Student Loan Debt in Bankruptcy
If you have student loans and are contemplating bankruptcy, you probably already know that bankruptcy offers little relief to student loan borrowers. Student loans are generally nondischargeable in bankruptcy for public policy reasons. When Congress codified this rule in the bankruptcy code it was designed to prevent abuse of the bankruptcy process. The fear was that recent graduates would discharge student loans upon graduation and thereby save thousands of dollars while enjoying the educational benefit bestowed upon them. Consequently, Congress enacted 11 USC §523(a)(8) which excepts student loan debt from discharge unless repayment would create an undue hardship. While the recent student loan crisis should spur Congress to revisit the nondischargeability of student loan debt, to date student loans remain generally nondischargeable in bankruptcy.
How To Discharge Student Loans: The Undue Hardship Exception
The one caveat to the general rule that student loan debt is nondischargeable in bankruptcy is the undue hardship exception. Under the exception, if repayment of all or a portion of student loans would impose an undue hardship upon the debtor, that portion of the student loan debt is dischargeable in bankruptcy. However, satisfying the undue hardship test is very challenging.
The Undue Hardship Test
The undue hardship test is composed of three parts, each of which must be satisfied by a preponderance of the evidence (more likely than not). The three parts are as follows:
- based upon current income and expenses the debtor cannot maintain a minimal standard of living for himself/herself or their dependents.
- Additional circumstances exist that show that the debtors state of affairs is likely to persist for a significant portion of the repayment period; &
- The debtor has made a good faith effort to repay the student loans
Part 1 – Minimal Standard of Living
To determine whether the debtor can maintain a minimal standard of living the debtor’s current expenses will be deducted from their current income. The debtor’s current income will include any income earned by their spouse or domestic partner to capture the household’s complete financial picture. Once the debtor’s current income is identified monthly expenses will be deducted. To satisfy this part of the test the resulting figure must indicate that the debtor cannot maintain a minimal standard of living; however, the resulting figure does not have to place the debtor below the poverty line. Furthermore, the debtor’s inability to maintain a minimal standard of living must be such that it would be truly unconscionable to require the debtor to make more money or reduce expenses.
Example: A debtor is attempting to discharge a student loan in bankruptcy. The monthly student loan payment is $200 per month. The debtor has $4,000 of monthly expenses and $3,500 of monthly income. After deducting monthly expenses from income the debtor has negative $500 per month. In this instance, the debtor cannot maintain a minimal standard of living if required to repay the student loan. However, if the debtor had $1,000 of luxury expenses per month, it would not be unconscionable to require the debtor to eliminate this luxury expense and thereby maintain a minimal standard of living while making the $200 student loan payment.
Part 2 – Additional Circumstances, Financial Condition Will Persist
The second part of the undue hardship test requires the showing of additional circumstances indicating that the debtor’s financial condition will persist for a significant portion of the repayment period. To satisfy this part of the test the debtor must show something that serves as an insurmountable barrier to their ability to repay the student loan. In other words, exceptional circumstances must exist that indicate an inability to repay the student loan for a significant portion of the repayment period. While mental or physical disability is not required, these forms of exceptional circumstances are good examples of insurmountable barriers to repayment.
Part 3 – Good Faith Effort
The third and final part of the undue hardship test requires showing the debtor’s good faith effort to repay their student loans. Actions indicative of good faith include negotiating with the lender to modify repayment terms so as to enable repayment, reducing expenses, and the length of time between graduation and filing for bankruptcy.
Call Sacramento Law Group To Get Help With Student Loans in Bankruptcy
As you can see, discharging student loans in bankruptcy is an uphill battle. If you have student loans and are considering bankruptcy, call Sacramento Law Group LLP at (916) 596-1018 to schedule your free consultation.
Sacramento Law Group
331 J St #200
Sacramento, CA 95814