With rising student loan debt and diminishing income and job opportunities for college graduates, many people with student loan debt are seeking discharge of their student loan debt. Discharging your student loan debt in bankruptcy is difficult, and I have heard many people, including attorneys, that you cannot discharge student loans in bankruptcy. However, an exception exists and the 9 Circuit Court of Appeals (Arizona is in the 9 Circuit) has issued a decision in recent years laying out what a debtor needs to do to discharge his or her student loans in bankruptcy. I have also heard from various sources that debtors successfully discharge their student loans about 40% of the time when they try. This may not sound like much, but its 40 points higher than 0%.
The Federal Bankruptcy Code says that a debtor may get a bankruptcy discharge on a student loan only if the debtor can prove that repayment of the loan would be an undue hardship. In order to prove an undue hardship, the debtor must file a separate action (called an adversary action) in the bankruptcy case by filing a Complaint to Determine Dischargeability. The debtor must then litigate the issues.
Because the term "undue hardship" is vague, bankruptcy courts have had to define it. Most bankruptcy courts, including the bankruptcy court in Arizona, have adopted what is called the Brunner test to define what "undue hardship" means. Pursuant to the Brunner test, a debtor may only get a discharge of his or her student loans if the debtor proves all three of the following factors:
1. Poverty. Upon examining the debtor’s income and expenses, the debtor cannot maintain a minimal standard of living for the debtor and the debtor’s dependants. The "minimal standard of living" is not a middle class lifestyle. It is a much lower standard of living. The debtor must maximize income and minimize expenses.
2. Persistence. The debtor’s current financial situation will most likely continue for a significant portion of the repayment period.
3. Good faith. The debtor must have made a good faith attempt to repay the student loans.
The most difficult part of the Brunner test is determining whether the debtor’s financial situation will likely persist. The Ninth Circuit says, in a case called Educ. Credit Management Corp. v. Nys, that absent other evidence, the court will presume that the debtor’s income will increase over time to the point that the debtor will be able to maintain a minimal standard of living and pay the student loans. Therefore, the debtor must present evidence to rebut this presumption. Nys set forth several additional circumstances for the court to consider, which should guide a debtor in what to present.
1. Serious mental or physical disability of the debtor or the debtor's dependents which prevents employment or advancement
2. The debtor's obligations to care for dependents
3. Lack of, or severely limited, education
4. Poor quality of education Lack of usable or marketable job skills
5. Underemployment Maximized income potential in the chosen educational field, and no other more lucrative job skills
6. Limited number of years remaining in the debtor's work life to allow payment of the loan
7. Age or other factors that prevent retraining or relocation as a means for payment of the loan
8. Lack of assets, whether or not exempt, which could be used to pay the loan
9. Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor's assets and/or likely increases in the debtor's income
10. Lack of better financial options elsewhere
The Nys test is not an exhaustive list. Therefore, a debtor may present other evidence of circumstances not on the above list as long as it tends to prove that the debtor’s financial situation will not improve for a significant period of student loan repayment.
Additionally, in Arizona this is not an all-or-nothing determination. The bankruptcy court may discharge all of a debtor’s student loans, some of the student loans, or none of them.
Since Nys, bankruptcy courts in the 9 Circuit, including Arizona, have not just discharged student loans for people who are seriously disabled or elderly. Courts have allowed the discharge of student loans for debtors who are young, able-bodied, and working. Courts have focused on factors such as the following.
1. The debtor had reached the maximum income level available in his or her field
2. The debtor lived in a rural area with no realistic opportunity to increase income
3. The debtor lived very frugally the debtor did everything possible to minimize expenses
4. The debtor had children with special health needs
However, there is no consistent recipe for proving this factor. Every case is different and there is always a possibility of something new or different carrying the day and there are plenty of cases where a court did not grant a discharge even when a debtor proved one of the circumstances above. Also, student loan lenders often fight aggressively against a discharge.
Therefore, if your student loan payments are making your life miserable, do not immediately give up hope on seeking bankruptcy relief. I offer a free bankruptcy consultation and have helped hundreds of people seeking bankruptcy relief.