Anytime there is a new president or a major change in Congress, we start to focus on what new laws may be enacted. We’ve heard ideas during primaries and debates, but now it’s time to see what is on the agenda. Some of it may be wishful thinking, but often policies that have been debated for years or decades get a fresh look, even if no change results. That brings me to this week’s topic: student loans.
There have been a lot of discussions about student loan forgiveness. Most recently there are calls for the forgiveness of $10,000 or even $50,000 in student loans. Student loan debt and default are at all-time highs. Add the hardships that many are facing during the pandemic and student loans are once again a hot topic.
There is a long history when it comes to student loans and bankruptcy. The general rule is that student loans backed by the government are not dischargeable (they cannot be eliminated). However, as with many aspects of bankruptcy, there are exceptions. If the loans impose an “undue hardship” they may be forgiven. Unfortunately, the test to determine an undue hardship is not easy. The Brunner Test, named after the case where it derives, has three parts:
- Whether you can maintain a minimal standard of living for you and your dependents, taking into account your income and other expenses, while still making your student loan payments;
- Whether your current financial situation is likely to continue for a large part of the student loan repayment period; and
- Whether you have made a good faith effort to repay your student loan.
This is certainly not an easy test to overcome, especially when federal loans offer many repayment options including income-based and graduated payments. In these types of repayment plans, the lender will receive some kind of payment leading to forgiveness after some number of years.
However, there is some good news for borrowers. Courts have slowly been more receptive to the concept of discharging student loans with the right set of facts. In some cases, a portion of the loan may be discharged if it covered non-tuition expenses such as housing or other living expenses. In addition, private student loans may also be discharged in a bankruptcy.
Most people don’t take advantage of this for two key reasons: (1) they may not be aware of what type of student loans they have or just assume that they have government-backed loans and (2) discharging student loans is time-consuming and costly. In order to eliminate student loans in a bankruptcy, you must commence an adversary proceeding (a lawsuit within a bankruptcy case) to get a determination from your bankruptcy judge. The litigation can drag on and can get expensive. It may be worth it if you stand to have a significant amount of debt eliminated.
What can you take away from all of this?
- It is possible to eliminate student loans with the right set of facts
- A good attorney can review your student loans to advise on whether they can be eliminated in bankruptcy
- Change may be on the way (but please do not sit back and wait as the idea of forgiving student loans is not new!)
Zimmelman Law PLLC
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