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    Main | Is it possible to finance a car while you are in a Chapter 13 Bankruptcy? »

    Are Student Loans dischargeable through bankruptcy?

    Section 523(a)(8) establishes that student loans are not dischargeable unless a debtor can prove “undue hardship” on him/her or the debtor’s dependents as a result of not discharging the debt. Undue hardship “encompasses a notion that the debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond reasonable control.” In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993). Moreover, “[u]ndue hardship is not simply a financial burden; there is a presumption that debtors who feel obligated to seek bankruptcy protection are financially burdened.” In re Gearhart, 94 B.R. 392, 393 (Bank. W. D. Pa. 1989).

    Many courts, including the Seventh Circuit, apply the “Brunner test” to determine whether undue hardship exists. To meet the Brunner test, the debtor must show the following characteristics:

    (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;

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

    (3) that the debtor has made good faith efforts to repay the loans.
    Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).

                Needless to say, the Brunner test is extremely difficult to jump over all three hurdles. Congress has shown a clear trend to make discharge more difficult. Courts are generally in agreement that ordinary or “garden variety” hardship, however defined, is insufficient. At an extreme are courts that require extraordinary circumstances such as the total physical incapacity of the debtor.

    However, while not granting discharge of the entire student loan, some courts have provided creative relief. For example, “where debtors have not been awarded undue hardship discharges, courts have utilized their equitable powers to provide partial discharges, grant payment deferrals or modify payment schedules.” Hafner v. Sallie Mae Servicing Corp. (In re Hafner), 303 B.R. 351, 356 (Bankr. S.D. Ohio 2003).

                Notably, there has been some recent push to bring about change regarding the difficulty of student loan discharge in bankruptcy. For instance, the concurrence in Roth called for the Ninth Circuit to “reconsider its adherence to Brunner. Hon. Jim D. Pappas stated that “bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.” 490 B.R. at 920 (Pappas, J., concurring). He also stated that the determination of “undue hardship is too narrow, no longer reflects reality, and should be revised.” Id. Judge Pappas concluded that “requiring that a debtor demonstrate that his or her financial prospects are forever hopeless is an unrealistic standard.” Id.

                The question of whether a student loan is discharged based on undue hardship is not automatically determined in a bankruptcy proceeding. The debtor must affirmatively seek such a determination. If the debtor fails to do so, and a loan holder subsequently attempts to collect on a loan, the loan’s dischargeability can be resolved at that later date either by the bankruptcy court upon reopening of the case or by a state court in a proceeding relating to collection of the note. In general, though, it is best to resolve the loan’s dischargeability in the bankruptcy court while the case is originally pending. To do so the debtor must file an adversary proceeding in the bankruptcy court seeking a declaratory judgment that the student loan debt is dischargeable.   Although some are urging the courts to reconsider the meaning of “undue hardship” with respect to student loans, Brunner remains to be the current standard.

    While we hope for Congress and the Courts to come up with a more lenient standard than the “Brunner” standard, we can help you defer your student loan payments while you are in bankruptcy. Deshur Law Firm LLC has successfully deferred payments on thousands of student loans for a period of five years or longer.

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