Can I Discharge Student Loans?
For many struggling with student loan debt, the possibility of discharging these obligations through bankruptcy offers a glimmer of hope. However, in the Tenth Circuit Court of Appeals, as elsewhere in the U.S., this process is complex and laden with legal nuances, especially when considering different types of student loans under § 523(a)(8) of the Bankruptcy Code.
Understanding 11 U.S.C. § 523(a)(8) and Types of Student Loans
Section 523(a)(8) of the Bankruptcy Code is the pivotal statute when it comes to student loan discharge. This provision generally excepts educational loans from discharge unless repaying them would impose an “undue hardship” on the debtor and their dependents. The complexity arises in the interpretation of “undue hardship” and the types of loans covered.
Federal Student Loans: These are often considered the gold standard due to their favorable terms and extensive repayment options. Unfortunately, they are also the most difficult to discharge in bankruptcy. The Tenth Circuit, like many others, applies the rigorous Brunner Test to determine if paying these loans would indeed cause undue hardship.
Private Student Loans: As made clear in the Tenth Circuit Court’s decision in McDaniel v. Navient Sols., LLC (In re McDaniel) , 973 F.3d 1083 (10th Cir. 2020), private student can be discharged in bankruptcy; however, there are three major types of private student loans that are nondischargeable:
Loans made or guaranteed by a governmental entity or made under a program funded under a program by a governmental unit or non-profit.
Obligations to repay funds received as an educational benefit, scholarship, or stipend.
Loans that are qualified education loans, as defined in section 221(d)(1) of the Internal Revenue Code of 1986
The most common of these three exceptions are loans made under a program funded by a non-profit. This is a nuanced area, and the specific terms of the loan are critical. To better understand the dischargeability of your student loans, Pioneer Bankruptcy will need to review your promissory note and other loan documents.
The Adversary Proceeding
Discharging student loans in bankruptcy typically requires an adversary proceeding, a separate lawsuit within the bankruptcy case. This process starts with filing a complaint to determine the dischargeability of the student loan debt. The debtor must then prove that repaying the loan would cause undue hardship.
In the Tenth Circuit, courts often use the Brunner test to assess undue hardship. The Brunner Test is a legal standard usedto determine whether a debtor can discharge student loan debt due to undue hardship, as outlined in § 523(a)(8) of the Bankruptcy Code. The test, originating from the 1987 case of Brunner v. New York State Higher Education Services Corp., comprises three essential criteria:
Inability to Maintain a Minimal Standard of Living: The debtor must prove that, based on current income and expenses, they cannot maintain a minimal standard of living for themselves and their dependents if forced to repay the student loans. This criterion examines the debtor's financial resources and necessary living expenses, focusing on whether repaying the loan significantly impacts the debtor's ability to meet basic needs.
Additional Circumstances Indicating Persistency of Condition: The debtor needs to demonstrate that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans. This involves showing that the hardship is not temporary but rather due to long-term factors such as chronic illness, lack of job prospects in their field, or disabilities.
Good Faith Efforts to Repay: Lastly, the debtor must have made good faith efforts to repay the loans. This generally means the debtor should have utilized available repayment options, like income-based repayment plans, and made some attempts to find suitable employment or reduce expenses.
Meeting all three criteria of the Brunner Test is necessary to successfully discharge student loan debt in bankruptcy for undue hardship. It's a stringent test, reflecting the policy that student loans should only be discharged in dire circumstances.
The Department of Education’s New Attestation Process
In a bid to streamline the undue hardship determination, the Department of Education has introduced an attestation process. This new procedure allows borrowers in bankruptcy to provide a detailed account of their financial situation, directly to the Department. The Department then reviews these attestations to decide whether to contest the undue hardship claim. The hope is this process will be both cheaper and faster in resolving student loan adversary proceedings.
Moving Forward
For those grappling with student loan debt and considering bankruptcy, it is essential to understand these complexities. Each type of student loan brings its own set of challenges in the context of dischargeability. Moreover, the process of an adversary proceeding requires a solid understanding of the legal standards and often the assistance of a skilled bankruptcy attorney.
While the new attestation process offers a streamlined approach, it’s still in its infancy, and how it will play out in court remains to be seen. As with all aspects of bankruptcy law, staying informed and seeking professional guidance are key to navigating these waters effectively.
In summary, while discharging student loans through bankruptcy is challenging, it's not impossible. Understanding the nuances of 11 U.S.C. § 523(a)(8), the different types of student loans, and the required legal processes is crucial for anyone considering this path. Remember, each case is unique, and consulting Pioneer Bankruptcy can provide invaluable guidance tailored to your specific situation.
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