Can I Erase Student Loans in Bankruptcy?

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Written by Jonathan Petts, Esq.  
Updated May 16, 2019

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According to reports, the average individual has $40,000 in student loan debt. Even if the interest rates are low, that amount of debt can keep you from major purchases, such as obtaining a mortgage. An individual who earns an entry-level salary will struggle to make the regular student loan payments.

Student loans are similar to other unsecured debts, such as credit cards, because there is no collateral. However, they’re different in the sense that they’re usually much harder to get erased during bankruptcy.

While students loans aren’t usually dischargeable, there are situations in which they can be eliminated. To discharge these debts, the debtor must prove there is an undue hardship. Different states have differing requirements to meet this phrase.

What Determines If My Student Loans Can Be Erased?

The Brunner Rule

When Congress revised the Bankruptcy Code in the 1970s, many people believed that some students borrowed their way through college and never intended to pay back the loan. That’s probably not true, but that’s what people believed.

So, Congress updated the wording to include the idea of “undue hardship.” Lawmakers intentionally did not define this phrase. Instead, they left it up to the courts.

In 1987, a court case in New York established the so-called “Brunner Rule.”

The Brunner Rule states that debtors could only discharge their student loan debts if they:

  • Had made a good faith effort to repay their loans;

  • Would be unable to maintain a minimal standard of living (i.e. live above the poverty line) if they had to make student loan payments; and

  • Their inability to pay was either permanent or expected to last for the duration of the repayment period.

Student loan debtors must have a physical, emotional, or some form of condition that affects their ability to get and keep a job. Additionally, they must have paid something on the loan.

It’s very hard to establish an undue hardship under the Brunner rule, so very few people try to have loans discharged using that approach. Sometimes, however, those who cannot afford to repay their student loans get at least a partial discharge.

Totality of the Circumstances

The harsh Brunner rule, along with the increasing amount of student debt, prompted some judges to look for a better way. The Brunner rule remains in effect in most places, but that status is beginning to change.

In 2003, the Eighth Circuit Court of Appeals replaced the Brunner rule with the totality of the circumstances test.

The “Totality of Circumstances” approach is not quite as rigid as the “undue hardship standard. The factors in the totality of the circumstances test are:

  • Your past, present, and future financial resources;

  • Your reasonable living expenses; and

  • “Any other relevant facts and circumstances surrounding each particular bankruptcy case.”

“Reasonable living expenses” is not the same thing as the poverty line. It’s reasonable to drive a fairly new car, live in a house that’s big enough for your family, and have a little money left over after you pay the bills for spending or splurging.

The biggest difference between the Totality test and the Brunner Rule is the “any other circumstances” consideration. Basically, the bankruptcy judge can consider other factors that might contribute to the debtors circumstances.

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What to Expect When You Request Your Student Loan Discharge: Mediation

Student loans won’t be discharged automatically in bankruptcy. In order to have your loans considered, you must file a motion with the judge to trigger the mediation process.

Mediation is often informal with the two sides getting together to work out a compromise. For example, if the debtor owes $50,000 in student loans, the lender might agree to forgive $25,000.

Mediation usually occurs outside a courtroom. Each side makes a brief opening statement, then the mediator goes back and forth between the debtor and lender. After an exchange of offers and counteroffers, the parties (hopefully) reach an agreement.

Mediation has a 75 percent success rate, assuming both parties have an open mind and negotiate in good faith.

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Although it is not common, student loans may be dischargeable in bankruptcy. You will need to prove that it will be almost impossible for you to repay them. If you’re successful, there are rare instances when your student loans can be included in your fresh start.

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