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Student Loans and Bankruptcy, Part 1 – Are They Ever Dischargeable?

Inverted_Fountain,_UCLANearly three million Americans currently have student loan debt, with estimates of the total amount owed reaching as high as $1 trillion. Because of changes to federal bankruptcy law in 2005, student loan debt is not dischargeable in bankruptcy except in very limited circumstances, although a bill pending in Congress seeks to expand those circumstances. As students at Los Angeles-area colleges and universities are graduating and perhaps preparing for graduate school, and as high school seniors are pondering college in the fall, the state of student loan debt, and the options of student loan debtors, bear scrutiny.

Student Loans and Bankruptcy Law

Federal bankruptcy law specifically excepts student loans from discharge in bankruptcy, unless doing so would cause “undue hardship” for the debtor or the debtor’s family. 11 U.S.C. § 523(a)(8). Despite this, an increasing number of students are filing for bankruptcy protection when they find themselves unable to repay their student loans, according to a report by the Consumer Finance Protection Bureau (CFPB). “Private Student Loans Report” at 72 (CFPB, Jul. 19, 2012). By the end of 2011, nearly $1.5 billion in student loans, about 1.3% of the total, were involved in bankruptcy proceedings. Id.

A bill currently pending in Congress, S. 114, the Fairness for Struggling Students Act of 2013, would make private student loans dischargeable in bankruptcy. Bankruptcy law has not allowed the discharge of federal loans since 1978, which included student loans issued entirely by the federal government. The 2005 bankruptcy law added all private student loans to the list of non-dischargeable debts. The CFPB and others in government have called for reforms to this part of the bankruptcy code.

Undue Hardship – The Brunner Test

The Ninth Circuit Court of Appeals, which covers all of California, uses a three-part test called the Brunner test to determine whether a debtor has met the “undue hardship” requirement of the bankruptcy statute. In re Pena, 155 F.3d 1108, 1111 (9th Cir. 1998), citing In re Brunner, 831 F.2d 395, 396 (2nd Cir. 1987).

  1.  The debtor must show that, if required to repay the student loans at their current level of income, they could not maintain a “minimal” standard of living. Pena, 155 F.3d at 1111.
  2. The debtor must show “additional circumstances” that would cause that situation to “persist for a significant portion of the [student loans’] repayment period.” Id.
  3. The debtor must demonstrate “good faith efforts to repay the loans.” Id.

This has proved to be a difficult test for most debtors seeking discharge of student loan debt to meet. Court cases addressing the question of “undue hardship” (also know as a “hardship discharge”) tend to look at whether the debtor has the capability to make enough money to cover the student loan payments and other debts, reserving a finding that a debtor has met the second part of the Brunner test for circumstances involving severe physical injury or other forms of disability.

Bankruptcy attorney Devin Sawdayi has dedicated his practice to helping people in the Los Angeles area cope with the often difficult process of personal bankruptcy. Since 1997, he has assisted clients with the restructuring or discharge of debts and the rebuilding of their lives, taking great care to address each client’s circumstances with respect and dignity. To schedule a free and confidential consultation, contact us today online or at (310) 475-9399.

More Blog Posts:

A Chapter 13 Bankruptcy Can Help You With Your Large Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, May 21, 2013

Photo credit: By b r e n t (some weird fountain at UCLA) [CC-BY-2.0], via Wikimedia Commons.