Student Loan Discharge in Bankruptcy

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It is possible to discharge student loans in bankruptcy although it is not easy. The procedure is that an adversary proceeding (a lawsuit) must be filed in the bankruptcy court to prove that the undue hardship standard has been met.

In addition to discharge for undue hardship, we file adversary cases to show that in many cases, private student loans are actually nothing more than consumer loans disguised as student loans. If we can show that the private loan is a non-qualified education loan, it is discharged like any other consumer debt such as a credit card. Various arguments exist such as the loan amounts were beyond the cost of attendance, for an ineligible institution or for an ineligible student. We teach this topic to other attorneys around the nation and while it is a relatively new argument, there is plenty of case law supportive of discharge. If you have an attorney tell you that a student loan can never be discharged in bankruptcy, that is the old and very outdated view, and frankly, you should see another attorney who actively practices in this area every day.

The good news is that a partial discharge is available in Florida per existing case law. A partial discharge can reduce principal, interest rates and monthly payments. Often times, settlements are negotiated. After all, if you lose the undue hardship hearing, it's not like the student loan company or U.S. government is going to receive full payment the next day. It is in their interest to formulate a reasonable payment plan that you can live with.

The procedure is as follows:

During the adversary proceeding, a Complaint seeking an Undue Hardship Discharge or Discharge of an Unqualified Education Loan pursuant to Section 523(a)(8) must be filed. The Complaint must be served on all the parties who hold your student loans. An adversary proceeding can be filed in a Chapter 7 or Chapter 13 bankruptcy. Even an old Chapter 7 case can be re-opened to file the adversary if grounds now exist to discharge your student loans.

Both parties can conduct discovery. You can expect that the student loan company will want information about your prior and current employment. If you have been unable to find work or remain underemployed, they will want to know where you have applied for work and the outcome of your application or interview. If you or your dependents have a medical condition, they will want medical records substantiating that. They will likely want to take your deposition and possibly that of your medical provider. In addition to your medical records you may want to put on medical testimony as well if your case goes to trial.

The well known Brunner standard is followed in Florida which requires that you show:

  1. the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for the debtor and the debtor's dependents;

  2. additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

  3. the debtor has made good faith efforts to repay the loans.

Most courts agree that the minimal standard of living contemplated by Brunner allows the debtor to purchase basic necessities. These include food, clothing, decent housing, utilities, communication services, transportation, and health insurance or the ability to pay for medical and dental expenses. The basic purpose of the first prong of Brunner is to ensure that, after borrowers have provided for their basic needs, they do not allocate discretionary income to the detriment of the student loan creditor.

Under the second prong, the circumstances causing you to be unable to pay your student loans in full, must be expected to exist for a lengthy period of time, 10 years or more. Do you lack marketable job skills or have a disability that prevents you from working most jobs?

Finally, the third prong will look at your efforts to pay the student loans. Have you made any payments when you could? Did you seek forbearance or deferment when were eligible such as for child birth or unemployment? Have you tried to qualify for an income based repayment plan?

If an undue hardship exists and you meet the Brunner three prong standard above, you are likely going to be able to obtain a partial or full discharge of your student loans from the bankruptcy court. And if your private student loan is determined to be an unqualified education loan, it may be discharged in full or partial, and you will not need to show a hardship.

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