Student loan debt has become a focus of discussion lately, as a political issue and as an issue that has a practical effect on many people’s lives. Students are increasingly taking on large amounts of debt to pay for higher education, the worth of which is increasingly doubtful. While a college education is still worth the cost, it is telling that the question is being raised at all.
The purpose of bankruptcy is to relieve people of the burden of debt. Student loan debt, however, has been one of the most difficult to discharge in bankruptcy. While there are clear guidelines for dealing with medical, credit card, and most other kinds of common debt in bankruptcy proceedings, student loan lenders have been aggressive in pursuing debt and ensuring that it is paid off in full.
The Department of Education recently released a letter that described new guidelines for when student loan debt can be discharged in bankruptcy. These guidelines describe the criteria for determining when paying the debt would constitute an undue hardship. This is the only reason a student loan debt would be discharged in bankruptcy.
There are two tests that are most commonly used to determine what qualifies as undue hardship. Both these tests are mentioned and outlined specifically in the Dept. of Education’s guidelines.
The Brunner Test
The Brunner Test is named for the case in which it was first articulated. There are three aspects to the Brunner Test. The debt can be discharged if repaying it would:
- Present a barrier to the debtor maintaining a minimal standard of living. Essentially, if repayment of this debt would force the debtor into poverty, that constitutes an undue hardship.
- If the debtor made a good faith effort to pay the debt, it could be discharged. This usually requires five years of regular payment, though the requirements may differ depending on the court.
- If the circumstances that make repayment difficult are likely to last some time. In other words, financial problems that are likely to last for a while, it is a hardship to repay the debt. If the debtor’s financial position is going to improve shortly, it might not be an undue hardship.
The Totality of Circumstances Test
The other test most commonly used is called the Totality of Circumstances Test. This test also has three criteria, which are similar to The Brunner Test. These criteria are:
- The debtor’s past, present, and future circumstances. This is similar to the ‘good faith effort’ and ‘ongoing circumstances’ aspects of the Brunner Test. If the debtor has the means to repay the debt, they should. If they had the means and did not attempt to repay the debt, that is an issue. And, if they are going to be able to repay the debt soon, then they should.
- The debtor’s necessary living expenses. This is similar to the ‘minimal standard of living’ aspect of the Brunner Test. If repaying the debt forces the debtor into poverty that obviously constitutes undue hardship.
- Any other relevant facts and circumstances. Mental and physical health, changes in marriage status or the health of family members, and any other circumstances that might affect the debtor’s ability to repay the debt. This is a catch-all for any problems that may come to bear on the debtor’s ability to repay the debt.
The Dept. of Education’s letter also outlined several other specific criteria that can be used to judge whether a loan would constitute an undue hardship.
- If the debtor’s bankruptcy is due to factors beyond the debtor’s control, this qualify. The circumstance specifically mentioned in the letter is a divorce that halves the debtor’s income.
- If the debtor qualifies for Total and Permanent Disability Discharge under the criteria, this could be a reason for discharge.
- Veterans who have been determined by the VA to be unemployable due to a service-connected disability qualify for undue hardship.
- A debtor who is close to retirement age and who took the loan out when they were younger may qualify. An older person who took out a loan on behalf of a child or younger person does not qualify.
- The debtor’s health is considered, and if they have become ill or disabled since originally incurring the debt.
- If the debtor has made an attempt to reduce expenses to make payments that is taken into consideration.
- If the debtor has the mental or physical ability to pursue other repayment options, such as administrative discharge and repayment plans.
It is important to note that these are guidelines and not directives. Each lender may make their determination on when to pursue a debt and when to allow an ‘undue hardship’ discharge. These guidelines were also released just at the beginning of July. This means that a process for handling these guidelines is still being evolved.
However, this does offer some significant guidance when considering whether to attempt to discharge your student loans in bankruptcy. Another factor that may be worth considering is that discharging your debt in bankruptcy usually means you are eligible for federal aid, if you had previously lost it due to financial problems.
While Congress has tightened the criteria for allowing discharge of student loan debt through bankruptcy, these new guidelines may signal a change. As the question is considered more widely, more options may be opened.