Discharging Student Loans Based on Undue Hardship
Student loan debt now exceeds $1.2 trillion, meaning Americans have more student debt than credit card debt. About one third of all bankruptcy filers have student loan debt, yet less than 1 percent of these filers attempt to have their student loans discharged. This is due to the perception that it is impossible to erase student loans in bankruptcy. In reality, approximately half of student loan borrowers who seek to obtain relief on the basis of hardship receive a full or partial discharge.
To get student loans discharged in bankruptcy, the debtor must clear an extra hurdle. There needs to be an adversary proceeding, which is essentially a trial conducted by the bankruptcy court, limited to the issue of student loans. The debtor needs to prove that they will incur “undue hardship” if their student loans are not erased.
In California, proving undue hardship requires that a debtor meet the criteria of the Brunner test, named after a 1987 federal case. Basically, this test looks at your present, future and past financial situation. It analyzes whether you’ve genuinely tried to make payments in the past, you cannot afford payments now and you’re unlikely to be able to afford payments in the future.
The Brunner test has three components and you must prove all of them:
- Continuing to pay your student loans would make you unable to maintain a minimal standard of living.
- Your financial situation is unlikely to improve in the foreseeable future.
- You have made a good-faith effort to repay the student loans.
You meet the first part of the test if you will have nothing left over after paying for expenses like shelter, food, medicine, clothes, utilities and some other essentials.
Proving that your situation is unlikely to change may involve evidence of illness, disability, lack of job skills or other circumstances that prevent you from being able to pay — not just right now, but in the future.
The final element, good-faith payment effort, means demonstrating that you tried hard to make payments and perhaps tried alternate payment plans but just couldn’t make it work.
Meeting this test requires objective evidence that may be hard to come by. You may need to hire expert witnesses, which can be a significant expense for someone who is already having financial trouble. Nevertheless, you should fully explore the possibility of discharging your student loans through bankruptcy.
The Law Offices of Michael Jay Berger can help you analyze your student debt situation to see if you may obtain at least partial relief. For a free consultation with our experienced Beverly Hills bankruptcy lawyers, please call 310-271-6223 or contact us online.