Over the last thirty-years student loan debt has nearly quadrupled.[1] Your average American carries student loan debt ranging from $25,000.00 to $50,000.00. Many people carry substantially more than that. When one is struggling financially student loans can feel like the proverbial straw that broke the camel’s back. And while deferment or income driven repayment plans may be options to alleviate that burden, for many those options feel like choosing between a rock and hard place. Many Americans live on fine margins, often paycheck to paycheck. When student loan repayment is piled on top of an already tight budget one could be forgiven for a feeling of hopelessness.
What does the law say?
It is oft misstated that “student loans can’t be discharged in bankruptcy.” It is not that they cannot be discharged in bankruptcy, it is that they usually are not discharged in bankruptcy. Student loans can absolutely be discharged but the burden of proof to achieve that relief is high. The Bankruptcy Code says that student loan debt is not discharged unless it would be an “undue burden” not to discharge it. Most courts view the undue burden standard through something called the Brunner test. It comes from a case called Brunner v. New York State Higher Education Services Corp. The Brunner test is a three-part test applied by bankruptcy judges and those three parts are:
1) that the debtor cannot maintain, based upon current income and expenses, a “minimal” standard of living if forced to repay the loans;
2) that there are additional circumstances that indicate that this state of affairs is likely to persist for a significant portion of the repayment period, and;
3) that the debtor has made a good faith effort to repay those loans.
Not every bankruptcy court follows the Brunner test, but for the majority of debtors, and certainly those in this circuit, it is the law of the land. Under Brunner failure to prove any one of the three prongs is fatal to a discharge. Student loans have always been dischargeable, but the stringent standard applied by most courts have led to only a few successfully ridding themselves of student loans.
Recent Developments
Recently the Justice Department and the Department of Education have released guidance on handling student loan discharges. Consumer advocacy groups like NACBA (the National Associate of Consumer Bankruptcy Attorneys) and the NCLC (the National Consumer Law Center) have been pushing for change in this area for years now. This new guidance is a direct result of these advocacy groups lobbying with the government for years on end. However, there are some things that should be kept in perspective.
First of all, this is only guidance and does not change the law. Brunner is still the prevailing law when it comes to student loan discharges. Second, this is still considered an extraordinary form a relief; and this guidance is designed to create an even playing field for all parties seeking a discharge from their student loans by having a set standard the government responds to these requests with. This does not necessarily make discharging student loans any easier, it just makes it more uniform. Third, and perhaps the most important thing for a debtor, or a potential debtor to consider, is that this is (likely) not going to be a part of the normal fee a bankruptcy attorney will charge. Lastly, at present this guidance is only applicable to federally backed student loans. Those seeking to discharge private student loans have a whole separate mountain to climb.
How does it work?
The standard for discharging student loans has not really changed by virtue of this new guidance. Achieving this still requires an adversary proceeding — think of that as a trial within your bankruptcy. What has changed is the form this is supposed to take. When a debtor files an adversary proceeding to discharge their student loans, they will be required to submit to the Justice Department an attestation concerning their financial status. This attestation is essentially a request to the government asking them to agree that your situation rises to the level of an “undue burden.” If the government agrees then the debtor and the United States enter into a consent agreement that the court considers. If the court agrees then the debt is discharged pursuant to the consent agreement. This may be a full discharge, or it may be a partial discharge. If the government does not agree, then the matter will be set for a trial and the debtor will need to prove their case by clear and convincing evidence.
The guidance and the attestation are designed to create a normalized standard of review by the Justice Department on these cases and promote settlements between the debtor and the Department of Education. The idea is that by engaging in a dialogue with each other and avoiding going through a trial, that usually ends in disappointment for the debtor, this relief can be obtained at a lower cost and a higher success rate than has been available until now.
What is the takeaway?
There is movement in the right direction. It has been a slow process getting to this point and there is still more work to do. Relief is becoming more accessible. Advocacy groups continue to push to refine this process and over the coming years we may see a debtor friendly version of this pop up, or we may see Congress pass legislation that changes the way Brunner is interpreted to make this process easier.
The bottom line is this: Bankruptcy attorneys have a vested interest in seeing this new process succeed. The guidance discussed in this article is new for us as well. Just as it is new for the attorneys who represent the United States in these cases. Only time will tell if this new practice leads to the desired result of more student loans being eligible for discharge. Speak with an experienced bankruptcy attorney to evaluate your situation.
[1] https://www.forbes.com/advisor/student-loans/average-student-loan-statistics/