Student loan debt continues to be a thorn in the side of many borrowers in the United States. It is said that student loan debt amounts to a collective total of $1.5 trillion. According to the Brookings institute, 40 percent of borrowers are expected to default on their student loan debts by the year 2023.
However, do these borrowers have any recourse when it comes to discharging these obligations in bankruptcy?
Undue Hardship
Previously, the only way borrowers could even think of discharging their student loan obligations was if they could show “undue hardship” to the bankruptcy court. However, no clear standard existed as to what an undue hardship consisted of, and bankruptcy courts across the country treated this standard differently.
The Department of Education hopes to change this inconsistent result. It announced in February of this year that it will review and possibly change policies that make it difficult for student loan borrowers to discharge their debts in bankruptcy.
"It's almost impossible to discharge student loans in bankruptcy," Student loan expert Mark Kantrowitz told CNBC. "The problem was undue hardship was never defined, and the case law has never led to a standardized definition."
The default test most bankruptcy courts resorted to is known as the “Brunner Test,” which requires a three-part test to prove undue hardship. If the person can prove all three prongs of the test, only then could the student loan debt be discharged. The requirements are:
- The individual debtor will not be able to maintain a minimal standard of living for himself or herself and their dependents, based on the debtor’s current income and expenses, if he or she is forced to continue to pay the student loan amount;
- Other circumstances exist that show that this condition is not likely to go away any time soon and is likely to continue for a significant part of the repayment period for the loan;
- He or she has made a good-faith effort in repaying the loans.
Courts have interpreted this test strictly. If a debtor wants to be successful in proving the requirements of the Bruner Test, a bankruptcy attorney is almost always needed to help the borrower establish the burden of proof.
"Basically, you have to show that you can't maintain a basic standard of living while paying the student loans and that this difficulty would last throughout a large chunk of your repayment period," said Miranda Marquit, personal finance expert at Student Loan Hero "Plus, you have to prove that you tried to repay the federal loans."
Changes Could Be Possible
The Department of Education is looking to provide an explicit definition for courts on what undue hardship should be. According to a former Department of Education official, it is highly likely that the Department of Education will end up broadening the definition of “undue hardship,” to allow for more borrowers to fall under this exception to the rule.
Democratic lawmakers have been consistently asking for a broader definition and one that is more clearly defined throughout the years. It is the hope of lawmakers that having a better definition, one that allows for more to qualify for this consideration, will help borrowers who are in serious financial trouble and are no longer able to pay off their student loans. Allowing more borrowers to utilize this qualification will help them utilize the bankruptcy system and hopefully begin to rebuild their lives.
Student Loan Debt Hurts the Economy
The new Chair of the Federal Reserve, Jerome Powell, recently testified regarding this issue before Congress. It is his belief that the current student loan crisis has the ability to hurt the greater economy in the long run, holding back economic growth that this country needs.
"It absolutely could hold back growth," said Powell, as reported by Market Watch. "You do stand to see longer-term negative effects on people who can't pay off their student loans. It hurts their credit rating. It impacts the entire half of their economic life."
He continued by saying, "Alone among all kinds of debt, we don't allow student loan debt to be discharged in bankruptcy. I'd be at a loss to explain why that should be the case."
CONTACT AN ARLINGTON BANKRUPTCY ATTORNEY FOR A FREE CONSULTATION TODAY
An experienced Texas bankruptcy lawyer can help you with any questions you may have about how filing bankruptcy will affect student loans, as well as other debt. Call the Law Office of Marilyn D. Garner at (817) 505-1499 NOW for a free consultation to discuss how bankruptcy may help you.