Rising education costs are making headlines, so let’s discuss borrowers’ rights to discharge student debt in bankruptcy.
Tuition costs have been rising for decades, outpacing American’s income growth and leaving many with overwhelming debt from student loans and interest. With these high costs in the headlines, there is also a lot of talk about how student loans cannot be discharged in bankruptcy. But in reality there is hope for those buckling under the weight of this debt. A recent article by U.S. News & World Report explains that student loan “borrowers can initiate an adversary proceeding and fight to have student loans discharged during bankruptcy.” In response to this news, our office has been sharing information about the truth behind discharging student loan debt in order to educate the community about their financial rights.
Make no mistake – discharging student loan debt in New York is not an easy process. But it is not impossible, according to recent comments by legal experts and attorneys. A borrower needs to prove to the Court that paying off this debt would cause “undue hardship.” This is done through something called an adversarial process, which involves complete litigation. Not all bankruptcy attorneys practice full litigation, so student loan debt can be a more complicated process for some. It can be long and detailed, as adversarial processes are guided by facts and evidence offered by the debtor. More is better here; detailed evidence can make the process easier, while more speculation leads to debtor depositions, expert witnesses, and medical experts. And undue hardship is up to the Court to define, so the more evidence and information the borrower has, the stronger his or her case.
In most cases, undue hardship is determined be conducting a Brunner Test. It is composed of three key elements. First, the borrower needs to prove that it is impossible to maintain a basic standard of living while paying off the loan. Second, this extreme hardship must continue for the majority of the repayment period, not just a small potion of it. And finally, the borrower must show he or she tried in good faith to repay the student loan debt, usually by way of an income-based repayment plan. This Test looks at the future of the debtor in order to determine whether or not it is truly “hopeless” for that person to repay the debt.
In most successful discharge decisions, the case involves a permanent mental or physical disability. However, a complicated health issue is not required to discharge student loan debt. In fact, it seems that too few borrowers in trouble are trying to discharge their loans after filing for bankruptcy. According to the same article, “around 40 percent of student borrowers in bankruptcy who filed for a student loan discharge were successful, according to a 2012 paper published by Iuliano in the American Bankruptcy Law Journal. But only around 1 percent of student borrowers who filed for bankruptcy took legal action to discharge their student debt.”
The stigma and uncertainty surrounding student loan debt have put up a wall between individuals in crisis and the prospect of filing for bankruptcy. There is a lot of misinformation about dealing with federal loans versus student loans, fear of high court costs, and ambivalence about discharging a smaller loan totalling a few thousand dollars. But small debt discharges can be more successful, and discharging student loan debt in general can significantly impact a person’s life for the better.