Discharging Student Loans in Bankruptcy

By Mark J. Markus, Attorney at Law

Eliminating (discharging) student (educational) loans in bankruptcy is very difficult. For cases filed in the ninth circuit (which includes California), there is a three part test (know as the Brunner Test) which requires that the party seeking to discharge the student loans prove three things:

First, that you cannot maintain, based on current income and expenses, a 'minimal' standard of living for yourself and your dependents if forced to repay the loans.

Second, that additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans.

Third, that you made a good faith effort to repay the loans.

Step 1 is usually fairly easy to satisfy, so long as your necessary monthly expenses (food, clothing, rent, etc.) are equal to or more than your take home income.

Step 2 is much more difficult to prove, for reasons that should be obvious. You have to show that you are unlikely to improve your financial circumstances for the next 10-20 years (i.e. the repayment period of the loans). If you are educated and not physically handicapped, this is very difficult to prove. Even if you are not educated and ARE physically prevented from working certain jobs, it is by no means a guarantee that you will satisfy this prong.

Step 3 is also very difficult and requires that you have tried to maximize your efforts to repay your loans. This includes both actually making payments on the loans, but also steps to consolidate and seek income contingent or other repayment methods. It requires proof that you have looked for jobs, tried to work, even tried to get a new degree to improve your situation.

The procedure for seeking to discharge educational loans in bankruptcy is to first file a bankruptcy case (either Chapter 7, Chapter 13, or Chapter 11) and then subsequently filing an adversary proceeding (i.e. lawsuit) against the student loan/education company (frequently, this is the United States government) and then going to trial on the above issues. It is not a cheap process and many debtors, unfortunately, simply cannot afford the legal fees to prosecute an undue hardship litigation.

The above is not meant to imply that it is impossible to discharge educational loans in bankruptcy. To the contrary, many times courts do grant the full discharge, and sometimes partial discharges, of the loans where they find the above elements have been proven. Obviously, it depends on the particular judge you get, as well as your proveable facts. However, bankruptcy should be the last resort for getting rid of student loans.

There are other ways to deal with student loans. For example, student loans can be eliminated for several specific causes, such as death, being permanently disabled, or closing of the school you attended before getting your degree. A good source to see these options is www.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html.

Moreover, it is important to look into all possible repayment options. The U.S. Department of Education Direct Loan Servicing Center offers the lowest monthly income-contingent repayment plans, as well as other programs for consolidation of qualifying student loans. Visit them for a free analysis at www.ed.gov/offices/OSFAP/DirectLoan/index.html and http://loanconsolidation.ed.gov/.

About the Author:

Mark J. Markus is a Los Angeles Bankruptcy Lawyer serving bankruptcy clients in Southern California

Phone: (818) 509-1173

Website: www.bklaw.com

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