Are Student Loans Currently Dischargeable In Bankruptcy? If Not, Will Student Loans Become Dischargeable In Bankruptcy Within The Next Few Years?

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No, student loans are not currently dischargeable in bankruptcy.

1. Historical Background There was a time in American history where student loans could be discharged in bankruptcy, just like credit card debt or other kinds of dischargeable debt. That changed when Congress amended the Bankruptcy Code because of its concern that lenders would be unwilling to issue student loans if the debt were dischargeable in bankruptcy.

   Congress initially required that you had to have made the payments for 5 years in order to discharge student loans in bankruptcy. Later it was increased to 7 years. Finally, in 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act took student loans out of the dischargeable category — with one carve out: An undue hardship on the debtor or the debtor’s dependents to have to repay the loan.

2. The Brunner Test The standard test used to determine undue hardship is called the Brunner Test. It is based on a New York case, In re Brunner, 46 B.R. 752 (S.D.N.Y. 1985), referred to in shorthand as Brunner. The Brunner Test has three prongs. To establish that the debt is dischargeable, the debtor must show:
   1. A current inability to maintain a minimal standard of living if forced to repay the loans;
   2. This state of affairs is likely to persist for a significant portion of the repayment period; and
   3. The debtor has made good faith efforts to repay the loans.

   An assertion of undue hardship is not self-executing. The borrower must successfully prosecute a lawsuit in the Bankruptcy Court to discharge the student debt. That kind of a lawsuit is called an adversary proceeding. Adversary proceedings are expensive because they’re complicated, and a good Brunner candidate typically doesn’t have the resources to pay an attorney to prosecute the adversary proceeding. As a result, a lot of the case law involves pro se debtors who went up against the sophisticated attorneys for the student loan lending companies, and lost. Undue hardship discharges have been granted where the debtor has been badly injured and is never going to work again, or something of that nature.

   The inflation rate on tuition has been very high — much higher than the inflation rate on just about anything else, including medical expenses. This is, in part, because the federal government guarantees student loans, and in part because of the inelastic demand for higher education.

   Unfortunately, people have incurred a great deal of student debt to get higher paying jobs, but those jobs don’t pay enough to service the student debt and afford a better standard of living than that available to trade school graduates. Trade school training may actually provide a better return on investment than a university degree.

   I’ve had people come to see me who have hundreds of thousands of dollars of student debt they could not service, in spite of having high income. I had a client who was a school principal, with $460,000 in student debt she couldn’t service in spite of monthly gross income of $13,000. Unfortunately, she couldn’t get rid of that debt in bankruptcy.

3. Possible Changes In The Law Occasionally, Congress considers making student debt dischargeable in bankruptcy. Some have asked the President to wipe out all student debt by executive ukase. However, the President probably does not have that power without congressional authorization.A bill has been proposed in Congress to make student loan debt dischargeable in bankruptcy after the debtor has made payments for at least ten years. If this becomes law, then there are large numbers of people who have made payments on their loans for ten years who could greatly benefit from filing a bankruptcy. However, given the history of such proposals, I won’t hold my breath.

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