In A Nutshell

1) Student Loans Are Non-Dischargeable In Most Bankruptcy Cases

2) Student Loans Are Dischargeable In Limited Circumstances (Brunner Test)

3) Possible Changes Coming?


In More Detail

1) Student Loans Are Non-Dischargeable In Most Cases

The starting point for student loans in bankruptcy is that they are non-dischargeable, meaning they cannot be wiped away in most bankruptcies.  For some reason, the Bankruptcy Code puts these loans into a separate category from typical unsecured debts (i.e. credit cards, personal loans, medical bills), making them extremely hard to discharge.  But, in certain, rare situations, student loans may be wiped away.


2) Student Loans Are Dischargeable In Limited Circumstances (Brunner Test)

The Bankruptcy Code states that student loans can be discharged “if they would impose an undue hardship on the debtor and the debtor’s dependents.” See 11 U.S.C. 523(a)(8)(A)(i).  The Code did not define “undue hardship.”  Instead this job was left to the Courts.  

The Middle District of North Carolina has adopted the 3 prong test known as the “Brunner Test” to determine if student loans will be discharged in a bankruptcy.  The 3 prongs are (1) the debtor could not maintain a minimal standard of living based on his current income and expenses if he also had to pay the student loans; (2) the current situation of the debtor will likely persist; and (3) the debtor had made a good faith effort to repay the student loans.  Other caselaw has been drafted which further defines each of these prongs. 

Even if you believe your situation meets the elements imposed by the Brunner Test, the Bankruptcy Court still has to agree and make a ruling in your favor to allow your student loans to be discharged.  This requires you to institute an Adversary Proceeding (“AP” for short) within your bankruptcy case.  In the AP you are the plaintiff and the student loan provider is the defendant.  The defendant must receive proper notice of the AP and will have their chance to object and rebut the information you put forward.  The point: even if your situation is dire you may have to fight the student loan provider in addition to convincing the Judge to have your liability for student loans discharged. 

Your situation will need to be analyzed through the prism of the Brunner Test to see if your student loans can go away.  Everyone’s situation is different, but there is a chance that you could wipe away your liability for student loans in addition to your other debt through the filing of a bankruptcy.  Get this process started now by letting me review your information by filling out our online intake form for a free bankruptcy evaluation.


3) Possible Changes Coming?

Public perception of student loans and student loan companies has turned negative over the recent past. More and more people view these companies as “taking advantage of” individuals to whom they loan money and that it is time for them to be more regulated by the government. Couple this growing public sentiment with the downturn in the economy due to the Coronavirus and we may have the political climate necessary for change.

Politicians have proposed many ideas for dealing with student loans. Some want to wipe them out completely. Others want to wipe out a portion (i.e. $10,000).

One possible solution could be to amend the US Bankruptcy Code to allow student loans to be discharged through the filing of a personal bankruptcy (Chapter 7 or Chapter 13).  Student loans could be treated like credit cards or unsecured personal loans and be wiped away by one going through the bankruptcy process.

No one knows what Congress will do.  We will all find out together.



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