Discharging student loan debt in bankruptcy: mission impossible?

While student loan debt is typically not dischargeable in bankruptcy, there are some circumstances under which it can be discharged. Working with experienced legal counsel gives a debtor the best chance of obtaining relief for this kind of debt in the bankruptcy process.

Bankruptcy is a critical lifeline for those who find themselves with burdensome debt they don't have a reasonable hope of being able to pay back on their own. Each debtor has a different debt profile at the beginning of the bankruptcy process. Some of the common debts brought to bankruptcy are unpaid medical bills, credit card debt, back taxes, unpaid mortgages, personal loans, and vehicle loans, though various other types of debt are brought as well.

The kind of relief bankruptcy provides to a debtor depends on the type of bankruptcy protection pursued. A Chapter 7 bankruptcy filing provides relief by allowing the debtor to liquidate non-exempt assets and satisfy creditors with the proceeds, while Chapter 13 bankruptcy puts a debtor on a three to five year repayment plan to allow the debtor to catch up with creditors. In both types of bankruptcy, though, discharge of remaining debts at the end of the process is a critical mechanism of debt relief.

General discharge requirements

Discharge of debts in bankruptcy takes away a debtor's personal liability for debts and prohibits creditors from continuing to collect on those debts. Secured debtors are still able to enforce a lien, but they may not collect on the debt itself.

In Chapter 13 bankruptcy, discharge of debts is ordinarily automatic, provided the debtor meets the ordinary requirements of the bankruptcy process and completes all payments under his or her court-supervised repayment plan. Discharge in Chapter 7 is also conditioned up meeting standard conditions of the process, but there is also the possibility of creditors objecting to discharge. In certain circumstances, too, the court may revoke a discharge after the fact.

In addition to these considerations, there is also the fact that not all debts are dischargeable in bankruptcy. Discharge of debts is slightly more inclusive in Chapter 13 bankruptcy than in Chapter 7 bankruptcy, though this usually isn't a deciding factor as to which form of bankruptcy should be pursued. One form of debt that is dischargeable in bankruptcy, but only under strict conditions, is student loan debt.

Discharging student loan debt

Student loan debt is an increasingly serious problem for young Americans. Unfortunately, bankruptcy is not an avenue the ordinary graduate can turn to for relief from this form of debt, since the conditions for discharge are so strict. Federal bankruptcy law provides that debt incurred for an educational benefit is not eligible for discharge, unless the debt would impose an "undue hardship" on the debtor and his or her dependants. Federal courts do not have a completely uniform approach to the question of when repayment of student loan debt constitutes an undue hardship.

Most circuit courts use the so-called Brunner test to determine whether student loan debt is dischargeable in bankruptcy. This test generally requires that the borrower has made a good faith attempt to repay student loan debt, but that it would be an undue hardship to require repayment because the circumstances creating the undue hardship are likely to continue for the term of the loan. Generally, "undue hardship" is interpreted strictly, meaning that it would require very difficult circumstances to meet the standard.

The eighth circuit, for its part, uses a totality of the circumstances approach, which is typically a more lenient standard. The first circuit-which includes Maine, New Hampshire, Rhode Island and Massachusetts-does not have declared standard. The fact that there is not yet a declared standard in the first circuit means that there is opportunity for opening a slightly more lenient rule than the Brunner test. This would be beneficial to graduates who don't have extremely challenging circumstances, but who nevertheless would immensely benefit from discharge.

Work with experienced legal counsel

While discharge of student loan debt is not something most debtors are going to be able to take advantage of, those who have circumstances that make repayment highly unlikely should consult with an experienced attorney to decide if bankruptcy is a possible avenue of relief for them. In some cases, a bankruptcy filing can open up doors for negotiating with creditors, and this can sometimes lead to out of court settlements. Whatever the circumstances, an experienced attorney can help represent a debtor's interest and protect his or her rights in the bankruptcy process, if it is pursued.

Sources:

Forbes, "Can Student Loans Be Discharged In Bankruptcy?," May 19, 2017.

United States Courts, Discharge in Bankruptcy, Accessed August 3, 2017.

Keywords: Bankruptcy, student loan debt