Can You Discharge Private Student Loans In Bankruptcy

Why Is It Called The Brunner Test

Named for the case in which it was first used, Brunner v. New York Higher Education Services Corp., the Brunner test is a three-part system used to determine whether or not a debtor is suffering from undue hardship, and cannot make student loan payments as a result.

The Brunner test is a complicated and often confusing process, and using it to establish undue hardship can be quite difficult. What makes things particularly confusing is that the Bankruptcy Code fails to actually define undue hardship, leaving this decision up to the courts.

The so-called âBrunner Ruleâ states that student loan debts are only dischargeable under extreme, and very specific, conditions. Although proving undue hardship under the Brunner rule can be difficult, partial discharges on student loans are more common. In some cases, student loan borrowers will be denied any discharge of federal or private student loans, but will be granted a lower interest rate, deferment, or an extension on the repayment period of student loans.

Can I Discharge Both Federal And Private Student Loans

Yes, both federal and private student loans are eligible for discharge. Private student loans may be exempt from the undue hardship requirement. Some private student loans may not be qualified education loans and therefore dischargeable just like any other types of debts. Your private loan may not be a qualified loan if you borrowed more than the schools cost of attendance or you attended an illegible school. The burden of proof is on the lender to demonstrate that your private loans are qualified loans before you must show undue hardship.

Above And Beyond Normal Circumstances

The second factor that courts will take into account is whether you have circumstances that are above and beyond normal circumstances and whether these circumstances will extend throughout a significant portion of the term of the loan. This can be tough to show in some cases because it can be subjective and speculative.

Some of the potential circumstances that courts have seen as above and beyond normal circumstances include serious mental or physical disability of the individual or the individuals dependents which prevents employment and circumstances relating to an individuals employment opportunities including poor quality of education, maximized income potential in the chosen education field, and limited remaining years in the individuals work life.

As stated above, these circumstances must extend throughout a significant portion of the loan. They can not simply be a temporary situation that is likely to change in the near future. Due to the subjective nature of this factor, you will require the submission of evidence to prove your circumstances.

When you are trying to discharge student loans in bankruptcy, it is critical to show your circumstances are above and beyond normal circumstances. Our experienced student loan lawyers are skilled in putting together the best argument and supporting evidence, including expert reports, etc., to show that your circumstances are above and beyond normal circumstances.

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What About Student Loan Discharge Based On Undue Hardship

There is more to the private student loan story. ;The filing of bankruptcy, by itself, will not discharge a student loan debt. If you want to discharge your private student loans in bankruptcy, you must file an adversary proceeding. An adversary proceeding is a lawsuit. In that adversary proceeding, you must prove that repaying your student loans will create an undue hardship.

You might be asking: If I am filing bankruptcy, then obviously the student loans are creating a hardship. I wish it were that simple. The short version of undue hardship is that the debtor cannot maintain a minimal standard of living if repaying student loans and additional circumstances exist that make this state of affairs likely to persist for the foreseeable future. I call this Financial Hardship Plus. The plus means that there must be more going in your life than the inability to pay. The plus is typically a health or mental issue, but sometimes extreme poverty or advancing age will work.

How Student Loan Bankruptcy Works

If youre considering student loan bankruptcy, falling behind on your payments will have had a major impact on your life. Perhaps your wages have been garnished because a lender took out a judgment against you. The federal government may have kept your tax refund and applied it to your federal student loans because they were delinquent or in default.

Your student debt is probably just one component of the financial challenges you are currently facing. In fact, if student debt is your only problem, you are unlikely to succeed in getting it discharged through bankruptcy. Filing for student loan bankruptcy is not easy and does not guarantee that you will walk away debt-free. But if your credit is shot, bankruptcy could be a faster path to financial health than continuing to struggle to pay your debts.

There is no special type of bankruptcy called “student loan bankruptcy.” Succeeding in having student loans discharged through bankruptcy involves filing Chapter 7 or Chapter 13 and then taking an additional step, which is filing an “adversary proceeding,” or AP. The AP must be filed to have your student loans considered for discharge.

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How Long Will The Adversary Proceeding Take For Federal Student Loans

As stated above, the adversary proceeding works much like a lawsuit in that it starts with a complaint and continues through a trial and appeal. How long this takes may depend on whether you have a federal student loan or a private student loan.

When dealing with federal student loans, you can expect the US government to fight the case to the end and there will generally be no settlement of any value to you offered by the federal government. As such, the adversary proceeding will almost always require proceeding through the summary judgment phase at the very least. This can take up to one year to complete. If the case requires a trial or goes through an appeal, you can expect this timeline to increase.

On the other hand, the odds of settling your case prior to trial are much higher with private student loans. These lenders tend to recognize that they may lose the trial. As a result, they may be more willing to negotiate than the government would be.

Every case is different and a student loan lawyer can help give you a better idea of the timeline specific to your situation.

Bankruptcy Discharge Of Student Loans Requires Undue Hardship

Qualified education loans, which include all federal education loans and many private student loans, cannot be discharged in bankruptcy unless this would impose an undue hardship on the debtor and the debtors dependents . Loans made under a program that is funded in whole or in part by a nonprofit institution are similarly excepted from discharge.

Congress did not define what it meant by the term undue hardship. Since most bankruptcy court cases involve financial hardship, it seems that Congress wanted a harsher standard for student loans, one that presents an unreasonable or excessive burden. But, Congress left it to the bankruptcy courts to define the term.

Originally, Congress allowed student loans to be discharged if they have been in repayment for at least five years. Undue hardship was provided as an alternative for discharging student loans that had been in repayment for a shorter period of time. The option for a bankruptcy discharge after five years was increased to seven years in 1990 and eliminated entirely in 1998, leaving just the undue hardship option.

Most courts have adopted one of two standards for defining undue hardship, either the Brunner Test or the Totality of Circumstances Test .

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Can You File Bankruptcy On Student Loans

Filing bankruptcy on student loans is possible, but youll have to go through a difficult process to do so. To discharge your student loan debt through bankruptcy, you have to prove that you cant pay back your student loans without it having an extremely negative impact on you and your dependents.

Courts are left with some room to interpret your eligibility. Most, but not all, federal courts of appeal evaluate hardship using a set of standards known as the Brunner Test, which was established as the result of a 1987 federal court ruling, Marie Brunner v. New York State Higher Education Services Corp.

Other courts, namely the 1st U.S. Circuit Court of Appeals and the 8th U.S. Circuit Court of Appeals, rely on a different standard, known as the totality of circumstances, which considers your past, present and future financial resources; reasonable living expenses; and other relevant factors related to bankruptcy proceedings.

When Are Education Loans Made By Private Lenders Dischargeable

Section 523 of the Bankruptcy Code protects three types of education debt from discharge:

If a loan meets one of those three requirements, you can get rid of it only if you prove you meet the undue hardship standard. Specifically, youâll have to show two things:

• you made a good faith effort to repay the debt
• your current and future financial situation doesnât allow you to maintain a minimal standard of living while making student loan payments throughout the repayment period.

However, not every private student loan meets the requirements to be excepted from discharge. Private student loans can be discharged without proving undue hardship if:

• a nonprofit did not back the loan
• the loan exceeded your cost of attendance
• the loan was not a conditional grant of money like an ROTC scholarship

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What Is The First Step In Discharging Student Loan Debt In Bankruptcy

To start the process of discharging your student loans through bankruptcy, you must first file for bankruptcy. The good news for you is that our bankruptcy lawyers have years of experience in bankruptcy and can skillfully guide you through the process of choosing the right path for you, which will generally be either a Chapter 7 or Chapter 13 bankruptcy. You can discharge student loans in bankruptcy through any bankruptcy chapter so we will advise you on which chapter is best for you.

It is also important to note that if you have already filed and completed a bankruptcy, you may not have to file another bankruptcy. In these circumstances, our student loan lawyers can file a motion to re-open your bankruptcy and then go through the steps to challenge your student debt. Dont worry though, this doesnt have any effect on your credit.

Are Private Student Loans Now Dischargeable

Media coverage of recent rulings from bankruptcy judges would lead you to believe that private student loans are now dischargeable. Thatâs not entirely accurate.

While there have been major rulings over the past few years that made some education loans made by some private lenders dischargeablein some places, thatâs not true in all bankruptcy courts across the United States.

Most people who file bankruptcy with education loans made by a private lender will still need to file a separate bankruptcy proceeding to let a judge decide their eligibility for discharge.

Circuit Courts that have ruled that private student loan debt was discharged:

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The Brunner Test Involves Three Prongs:

• You must currently be unable to repay the student loans and maintain a minimal standard of living for yourself and your dependents.
• The circumstances that prevent you from repaying the student loans must be likely to continue for most of the repayment term of the loans.
• You must have made a good faith effort to repay the student loans, including using options for financial relief, such as deferments, forbearances and income-driven repayment.

The Totality of Circumstances Test omits the third prong of the Brunner Test and is more flexible.

In addition, the borrower must file the undue hardship petition in an adversarial proceeding, where the lender can challenge the claim of undue hardship.

Can I Discharge A Private Student Loan In Bankruptcy

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In a Nutshell

Private student loans are loans extended by private lenders that are not backed by the federal government. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.

Written byAttorney John Coble.

Private student loans are loans extended by private lenders that are not backed by the federal government. These loans are only to be used for qualified educational expenses. Private student loans don’t have many of the relief provisions allowed for by federal student loans. There are rarely any income-based repayments, forbearances, and deferments made available when debtors repay these loans. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.

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Can You Discharge Private Student Loans In Bankruptcy Financial Options For Students

The following article is a summary prepared by the authors of various articles about bankruptcy. It is not intended as, and should not be read as, legal advice. If you feel you need to consider bankruptcy, you should contact an attorney in your area who is qualified to lead you through this complex and weighty decision. You should not rely on this article or any Internet article to guide your decision.

Contrary to conventional wisdom, a private student loan, much like a federal student loan, is dischargeable under the right circumstances and has been since 2005. Popular thought may lead you to believe that filing bankruptcy on your private student loans is hopeless, but thats not exactly true.

If you cant repay your student loans, or you do not qualify for public service loan forgiveness or flexible student loan repayment plans, such as an income driven repayment plan, extended repayment plan, or Pay As You Earn Repayment Plan , then bankruptcy may be an option to consider. This is especially true for borrowers who take loans out after , as Congress looks to end PSFL and other repayment programs.

As a student, you can also take advantage of credit cards intended just for students to begin building your credit and earning rewards. Check out Credit.coms expert guide to the best credit cards for students to earn cash back and save on things like books, dining, entertainment, and even electronics.

The 8th Circuit Courts Landmark Ruling

Ive got great;news for those of you interested in seeking a private student loan discharge via filing for;bankruptcy:

The Eighth Circuit Court of Appeals recently affirmed a decision make by its Bankruptcy Appellate Panel that opened the way for a borrower to receive discharges on 15 different private student loans and a combined total balance of over $118,000!

This is a landmark case that cuts against the grain of the logic typically used to;determine whether or not bankruptcy should provide some relief from private student loan debt, and;a case;that could pave the way for you to get your loans forgiven by filing for bankruptcy.

For details on the case, please view our;write-up at the bottom of this page,;or click here.

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How Does The Brunner Test Work

In addition to establishing whether physical, emotional, or other problems are affecting the individualâs ability to get and hold a job, the Brunner test determines if the debtor:

• Would be unable to maintain a minimal standard of living, and would fall below the poverty line, if student loans had to be repaid;

• Is suffering from circumstances that will make repayment a hardship for the remainder of the term, or permanently;

• Made good faith efforts to repay the loan.

Even if all three of the above scenarios exist, a hardship-based student loan discharge does not occur automatically in bankruptcy. You must first file a complaint in a separate adversary proceeding. During this proceeding, you will make your case as to why your student loan debt should be discharged as part of your bankruptcy. The judge will consider your argument and any substantiating evidence, and will then make a decision incorporating the aforementioned Brunner rule. It should be noted that the undue hardship standard for the Brunner test is quite high.

Consider Hiring A Lawyer

While you dont technically have to go through a lawyer when filing bankruptcy on student loans, bankruptcy can be an incredibly complex process. It requires determining which type of bankruptcy youll file for and submitting an extra lawsuit, called an adversary proceeding . Going through it all alone could mean extra time, incorrect filings and, possibly, a lost case.

However, one thing to consider is that hiring a student loan lawyer could actually hurt your chances for discharging your student loans in bankruptcy, according to Fuller. Thats because some judges may feel that if you can afford fees for an attorney, then you can afford to be paying back something on your loans, which would disqualify you from experiencing undue hardship.

If you dont know a lawyer, dont worry. You can find one through the American Bar Association. You might be eligible for a lawyer at no cost to you through the Legal Services Corporation, an independent nonprofit created by Congress that offers financial support for civil legal aid to low-income Americans. Just make sure you pick a lawyer that specializes in bankruptcy and has very good reviews.

If you opt to handle your case yourself, a recent study by the American Bankruptcy Journal noted that debtors without a lawyer were just as likely to have their student loans discharged by a bankruptcy judge as those who worked with an attorney.

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