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![\"Student](\"https:\/\/thecollegeinvestor.com\/wp-content\/uploads\/2018\/02\/Student_Loan_Forgiveness_For_Engineers_1280x720.png\" "\\"Student_Loan_Forgiveness_For_Engineers_1280x720\\"")
<\/span><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\nKey Points<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n For years, student loan borrowers have been told that their debt cannot be discharged in bankruptcy, <\/strong>but that’s not entirely true. While the process is difficult, federal law does allow student loans to be wiped out<\/strong> under specific conditions, particularly when borrowers can prove undue hardship<\/strong>.<\/p>\n The problem? It almost never happens.<\/strong> Less than 0.04% of borrowers<\/strong> who file for bankruptcy<\/a> actually succeed in getting full or partial student loan relief. The legal standard is so high that many don’t even try.<\/p>\n During the Biden Administration, there was momentum building for change – including improved guidance to the Department of Education and Department of Justice (who would deal with the court cases), and a bipartisan bill was even introduced called the Fresh Start Act. <\/p>\n Here’s what you need to know.<\/p>\n<\/div>\n Discharging student loans in bankruptcy is legally possible. But in practice, it’s very rare. Only 0.04% of student loan borrowers who file for bankruptcy succeed in getting a full or partial discharge of their student loans.<\/strong> Many don’t even try to get their student loans discharged because of the expense and difficulty in qualifying for a discharge. <\/p>\n The U.S. Bankruptcy Code at 11 USC 523(a)(8) provides an exception to discharge of certain student loans. It blocks student loan discharge in bankruptcy unless the borrower is able to prove that keeping the debts “would impose an undue hardship<\/strong> on the debtor and the debtor’s dependents.”<\/em><\/p>\n<\/div>\n Unfortunately, Congress did not define what it meant by ‘undue hardship.’ So it was left to the courts to decide when student loans loan discharge in bankruptcy would be legally allowed. <\/p>\n The courts have established two standards:<\/p>\n The 1st circuit uses both tests. <\/p>\n<\/div>\n The Brunner Test <\/strong>involves three prongs, all of which must be satisfied:<\/p>\n<\/div>\n The Totality of Circumstances Test is similar, but does not include the third prong from the Brunner Test and is more flexible. Under the Totality of Circumstances Test, the court considers:<\/p>\n Unlike the Brunner Test, there is no requirement that all three prongs must be met. <\/strong><\/p>\n Both tests establish a very harsh standard for bankruptcy discharge of student loans. In fact, one bankruptcy judge<\/a> in 1985 referred to the standard as requiring “a certainty of hopelessness.”<\/em> <\/p>\n Ironically, this judge’s description influenced some bankruptcy court judges to adopt even more stringent standards. Until very recently<\/a>, many bankruptcy courts looked at the ‘certainty of hopelessness’ as the standard for determining whether a student loan discharge in bankruptcy was legally allowed rather than the standards actually required by the Brunner Test and the Totality of Circumstances Test. <\/p>\n<\/div>\n Although not necessarily the same as undue hardship, financial hardship<\/strong> has a similar definition. Financial hardship is defined in the regulations for administrative wage garnishment [34 CFR 34.3] as:<\/p>\n<\/div>\n An inability to meet basic living expenses<\/strong> for goods and services necessary for the survival of the debtor and his or her spouse and dependents.”<\/em><\/em><\/span><\/li>\n<\/ul>\n<\/div>\n Financial hardship is determined by comparing costs incurred for basic living expenses for the borrower, the borrower’s spouse and the borrower’s dependents with all income available to the borrower from any source. [34 CFR 34.24] The regulations for administrative wage garnishment<\/a> were added in 2003 and are based on the Debt Collection Improvement Act of 1996 (DCIA). [31 USC 3720D]<\/p>\n Although Congress did not initially define the term ‘undue hardship,’ the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-31) added a definition of undue hardship at 11 USC 524(m):<\/p>\n<\/div>\n It shall be presumed that such agreement is an undue hardship on the debtor if the debtor’s monthly income<\/strong> less the debtor’s monthly expenses as shown on the debtor’s completed and signed statement in support of such agreement required under subsection (k)(6)(A) is less than the scheduled payments on the reaffirmed debt<\/strong>. This presumption shall be reviewed by the court.<\/em><\/span><\/li>\n<\/ul>\n<\/div>\n This is the equivalent of the first prong of the Brunner Test.<\/p>\n<\/div>\n The second prong of the Brunner Test requires the borrower’s inability to repay the debt must be likely to continue for a “significant portion” of the repayment term of the loan<\/strong>. Just how long is a significant portion of a loan’s repayment term?<\/p>\n The judge’s ruling in Brunner v. New York Higher Education Services Corporation (46 B.R. 752, S.D.N.Y. 1985) indicated that the repayment term is generally ten years:<\/p>\n<\/div>\n After all, it is not unreasonable to hold that committing the debtor to a life of poverty for the term of the loan – generally ten years – imposes “undue” hardship. But when the Brunner Test was issued, in 1987, student loans could be discharged after five years without requiring a showing of undue hardship. This suggests that a significant portion of the repayment term is less than five years<\/strong>. Otherwise, borrowers could have obtained a discharge after five years without needing to demonstrate undue hardship. A showing of undue hardship was necessary only if the borrower wanted to discharge their federal or private student loans in less than five years. <\/p>\n A five-year standard has been used in other discharge options for federal student loans, such as Total and Permanent Disability Discharge. See 20 USC 1087(a)(1)<\/a>. So it would be reasonable for the U.S. Department of Education to decide that student loan discharge in bankruptcy is legal when the borrower’s situation is of a permanent character and has lasted (or is expected to last) for at least five years.<\/p>\n<\/div>\n Before 1976, student loans<\/a> could be discharged in bankruptcy without a waiting period and without requiring the borrower to demonstrate undue hardship prior.<\/p>\n But a 5-year waiting period was added by the Education Amendments of 1976 for borrowers who could not demonstrate undue hardship. The waiting period was increased from 5 years to 7 years in 1990 through the Crime Control Act of 1990 and eliminated in 1998 through the Higher Education Amendments of 1998.<\/p>\n This left demonstrating undue hardship as the only option for discharging student loans in bankruptcy. But Senators Richard Durbin (D-IL) and John Cornyn (R-TX) introduced the FRESH START Through Bankruptcy Act of 2021<\/a> on August 4, 2021.<\/p>\n The<\/strong> Related: <\/strong>This is very similar to our chargeback model in our proposal to reform student loan debt<\/a>, and also the proposal under the College Cost Reduction Act<\/a>.<\/p>\n Under this bipartisan legislation, the 10-year requirement would not count “any suspension of the repayment period.” But borrowers would remain eligible to discharge their student loans sooner if they’re able to demonstrate undue hardship. <\/p>\n The choice of a 10-year waiting period is, perhaps, based on the idea that a 10-year repayment term is a reasonable amount of time to be repaying student loan debt. It is also the standard repayment term<\/a> for a federal education loan.<\/p>\n<\/div>\n In November 2022, the Department of Education, in conjunction with the Department of Justice, announced that they will be “not blocking” petitions for bankruptcy and they will set clear guidelines for their attorney’s in dealing with student loan bankruptcy proceedings.<\/p>\n This isn’t a complete win for borrowers, but it should make the process of getting a bankruptcy discharge easier for those who really need it. See the full announcement here<\/a>.<\/p>\n<\/div>\n The U.S. Department of Education can choose to not oppose undue hardship petitions for the bankruptcy discharge of federal student loans. It should exercise this authority more often<\/strong>. Here are a few recommendations for when undue discharge petitions for student loan should be allowed without opposition.<\/p>\n<\/div>\n If the cost of litigation exceeds one third of the potential recoveries, the U.S. Department of Education should not oppose the undue hardship petition. This should be a mandatory standard and not advisory or discretionary in nature.<\/p>\n<\/div>\n “It is a waste of taxpayer resources to litigate a case when the actual amount recovered will be less than the cost of the litigation.”<\/em><\/p>\n<\/div>\n Moreover, when evaluating potential recoveries, the U.S. Department of Education should consider the likelihood of collecting the loan and the amount that is likely to be collected. It should not assume that the full amount of debt will be collectable if the discharge petition is denied. It is a waste of taxpayer resources to litigate a case when the actual amount recovered will be less than the cost of the litigation.<\/p>\n<\/div>\n When deciding whether to oppose an undue hardship petition for bankruptcy discharge, the U.S. Department of Education should also consider the:<\/p>\n For example, the U.S. Department of Education could adopt a standard that allows undue hardship discharge for borrowers who are age 65 and older. More than a third of elderly borrowers age 65 and older are in default on their student loans<\/strong>. <\/p>\n The U.S. Department of Education should also consider whether the borrower dropped out of college and was unable to complete their education. In these cases, borrowers have the debt but no degree that can help them repay that debt. <\/p>\n The U.S. Department of Education could also allow bankruptcy discharge for borrowers who are living under the poverty line and who are likely to continue in such a low-income status for at least five years.<\/p>\n<\/div>\n The U.S. Department of Education should also not oppose an undue hardship petition when the borrower has high ongoing medical and disability-related expenses<\/strong> for themselves or a dependent. <\/p>\n Total and Permanent Disability (TPD)<\/a> does not apply when it’s the borrower’s dependent who is disabled, as opposed to the borrower. Nevertheless, borrowers may have high medical and disability-related expenses that affect their ability to repay their student loans. Likewise, the borrower may be unable to work a full-time or better-paying job because of the need to take care of a disabled child or elderly parent. <\/p>\n If the borrower has a severe disability that seems likely to qualify for a TPD discharge, the U.S. Department of Education should not oppose the undue hardship discharge. The availability of disability discharges and other accommodations should not bar a disabled borrower from seeking an undue hardship discharge.<\/p>\n The U.S. Department of Education should also consider whether the financial settlement from a divorce<\/a> or separation significantly affects the borrower’s ability to repay the debt. The Tax Cuts and Jobs Act of 2017 eliminated the above-the-line deduction for alimony payments<\/strong> for people who get divorced in 2019 or a later year. <\/p>\n This means that adjusted gross income (AGI) is higher for taxpayers who pay alimony. Accordingly, the payments made under an income-driven repayment plan (which base discretionary income on AGI) may no longer reasonably reflect the borrower’s ability to repay their student loans.<\/p>\n<\/div>\n Not everyone agrees that student loan discharge in bankruptcy should be legally allowed more often. Two of the most common reasons that people give for why the Education Department should continue to oppose student loan discharge in bankruptcy as often as it has in the past are:<\/p>\n But, as we explain below, both of these arguments break down at some level. Let’s take a closer look.<\/p>\n<\/div>\n The availability of income-driven repayment (IDR) plans<\/a> with a zero monthly payment for borrowers doesn’t prevent someone from meeting the definition of undue hardship discharge. In fact, could can argue that a borrower with a zero monthly payment under an IDR plan has<\/strong> demonstrated undue hardship.<\/p>\n The poverty line is a minimal standard of living, where the family has no discretion in how income is spent to pay for necessary living expenses. A borrower who is living below the poverty line is unable to pay anything toward their student loans. Moreover, if the borrower were able to use an IDR plan with income less than 150% of the poverty line, the potential recovery is zero and the cost of litigation clearly can’t be recovered.<\/p>\n Even a non-zero monthly student loan payment under an IDR student loan repayment plan<\/a> may be unaffordable when considered in the context of the borrower’s net income and actual necessary expenses. Also, if the monthly student loan payment<\/a> is low, the cost of servicing the loan may exceed the payments made by the borrower. This is not cost effective for the federal government.<\/p>\n When a borrower’s student debt under an IDR plan is negatively amortized, it persists and can grow without bound. This may prevent the borrower from getting a job and renting an apartment, as employers and landlords often consider a person’s credit history. <\/p>\n This is inconsistent with the goal of the U.S. Bankruptcy Code in providing borrowers with a fresh start by wiping the slate clean. A bankruptcy remains on the borrower’s credit history for 10 years, while student loans can last for decades. <\/p>\n<\/div>\n The offset of Social Security disability and retirement benefit payments<\/a> to repay defaulted federal student loans is a morally bankrupt<\/em> public policy<\/strong>. <\/p>\n Most recipients of Social Security benefits are on fixed income and rely on the Social Security benefits to pay for food, medicine, housing and other basic living expenses. If Social Security is a borrower’s only source of retirement income, offsetting Social Security benefits represents an undue hardship on the borrower and the borrower’s dependents. <\/p>\n When the federal government gives with one hand while taking back with the other, it places people in dire financial circumstances. They may have to choose between paying for medication and paying for food. <\/p>\n The U.S. Department of Education should stop offsetting Social Security disability and retirement benefits<\/a>. Or, at the very least, they should use means-testing to determine when offsetting these benefits is not entirely unreasonable.<\/p>\n<\/div>\n The Education Department suspended collection activity on defaulted federal student loans during the payment pause and interest waiver, and for the 12 months after repayment has resumed.<\/p>\n This year, the U.S. Department of Education will once again garnish wages<\/a>, intercept income tax refunds and offset Social Security disability and retirement benefits to repay defaulted federal student loans. <\/p>\n And thanks to the current “undue hardship” standard, it will be difficult for those borrowers to receive a legal student loan discharge in bankruptcy – but not impossible.<\/p>\n Don’t Miss These Other Stories:<\/strong><\/p>\n<\/div>\n <\/a><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n\n\n\n\n
\n\n\n\t\tTable of Contents<\/strong><\/span><\/p>\n\n\nIs Student Loan Discharge In Bankruptcy Legal?<\/a><\/div>\nProposed Legal Changes To Student Loan Discharge In Bankruptcy<\/a><\/div>\nRecent Student Loan Bankruptcy Updates<\/a><\/div>\n<\/div>\n\nReasons For The Department Of Education To Oppose Fewer Undue Hardship Discharge Petitions<\/a><\/div>\nWhy Some Object To Allowing More Student Loan Discharges In Bankruptcy<\/a><\/div>\nFinal Thoughts<\/a><\/div>\n<\/div>\n<\/div><\/div>\n<\/div>\n\n\n<\/div>\n<\/div>\n<\/div>\n\nIs Student Loan Discharge In Bankruptcy Legal?<\/h2>\n<\/div>\n
\n\nTraditional Definitions Of Undue Hardship<\/h3>\n<\/div>\n
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\nBrunner Test<\/h4>\n<\/div>\n
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\nTotality Of Circumstances Test<\/h4>\n<\/div>\n
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\nRecent Definitions Of Undue Hardship<\/h3>\n<\/div>\n
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\n<\/div>\n<\/div>\n\n\nDuration Of Undue Hardship<\/h3>\n<\/div>\n
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<\/em><\/span><\/li>\n<\/ul>\n<\/div>\n\n\nProposed Legal Changes To Student Loan Discharge In Bankruptcy<\/h2>\n<\/div>\n
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\nFRESH START ACT<\/strong>
\nwould<\/strong>
\nrestore the ability of borrowers to discharge federal student loans after a 10-year waiting period without demonstrating undue hardship. <\/strong>And under certain circumstances, the college attended by the student when the loans were borrowed would be required to repay as much as half of the discharged debt.<\/p>\n\nRecent Student Loan Bankruptcy Updates<\/h2>\n
\nReasons For The Department Of Education To Oppose Fewer Undue Hardship Discharge Petitions<\/h2>\n<\/div>\n
\n\nCost Of Collection<\/h3>\n<\/div>\n
\n\n\n\nBorrower Unable To Repay Debt<\/h3>\n<\/div>\n
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\nBorrowers With High Necessary Expenses<\/h3>\n<\/div>\n
\n\nWhy Some Object To Allowing More Student Loan Discharges In Bankruptcy<\/h2>\n<\/div>\n
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\nIncome-Driven Repayment Plans<\/h3>\n<\/div>\n
\n\nSocial Security Offsets<\/h3>\n<\/div>\n
\n\nFinal Thoughts<\/h2>\n<\/div>\n
\n\n\n\n\n\n\n‘Sell In May And Go Away’ Investment Strategy<\/a><\/span><\/h4>\n<\/div>\n<\/div>\n<\/div>\n
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