When considering bankruptcy, debtors are often under the impression that student loans cannot be discharged through a chapter 7 or chapter 13 bankruptcy. While this is true for most debtors, it is not impossible to discharge one’s student debts by filing a separate action known as an “adversary proceeding” requesting that the court find that repaying their student debts would be an undue hardship on the debtor and their dependents. The bar set for these adversary proceedings is extremely high, however, and a debtor who is low income or who acquired a loan from a for-profit school has a higher chance of success.
In order for the Court to discharge the debtor’s student debt, the debtor must first demonstrate that it would be an undue hardship for the debtor to repay the debts. The “test” a Court uses may vary depending on the court the debtor is in. Additionally, some Courts look at the undue hardships tests as all or nothing, or allow a debtor to partially discharge student debts. The most common test that the courts use is the Brunner Test. The Brunner Test requires that a debtor meets all factors of the test. The first factor a debtor must meet is 1) based on the debtor’s current income and expenses, the debtor cannot maintain a minimal standard of living for themselves and dependents if they are required to repay their student loans. This is known as the “poverty factor”. The second factor a debtor must meet is 2) that the debtor’s current financial situation is likely to continue for a significant part of the repayment period. The second factor is known as the “persistence factor”. The final factor that a debtor must meet is 3) that the debtor has made a good faith effort to repay their student loans. This is the “good faith standard”. The second, and not as frequently used test, is the Totality of Circumstances Test. Under this test the Court will look at all of the relevant factors in the debtor’s case to determine if requiring the debtor to repay these loans would be an undue hardship to the debtor and their dependents.
While it is up to the Court to determine whether the debtor meets the standards for undue hardship, there is a common pattern of discharge among specific cases. For example, a number of Courts have granted discharges in cases where the borrower did not benefit from the education or went to a fraudulent school. Another example of a court finding the debtor qualified for undue hardship is as follows: a 50-year-old student loan borrower earning about $8.50/hour as a telemarketer was granted a discharge. The court agreed that the borrower had reached maximum earning capacity, did not earn enough to pay the loans and support minimal family expenses and appeared trapped in a “cycle of poverty.”
If a debtor pursues a student loan discharge, there are three likely outcomes from the court. The first outcome is a full discharge of the loan. This is the ideal outcome as the debtor does not have to repay any of the debt. The second outcome is a partial discharge. Under this outcome the court will discharge a portion of the debt and hold the debtor responsible for the other portion. This is likely when the court finds a debtor is able to pay back their private loans but cannot afford to pay for their federal loans. The final, and the most common, outcome is no discharge. This is where a court finds that a debtor is capable of repaying their student loans, however, a court may adjust aspects of the loan such as the interest rates if it makes it more likely that the debt will be repayable by the debtor.