You may have heard the commonly believed urban legend that student loans can’t be discharged in bankruptcy. It’s simply not true. Student loan debt may be discharged on the basis of undue hardship. Yet only a shocking 0.1 percent of bankruptcy filers with student loan debt try to have their student loans discharged due to undue hardship. This is particularly disturbing in light of the fact that judges approve undue hardship discharges for 40% of the debtors who bother to ask.
In 2007, of the 169,774 student loan debtors filing bankruptcy, only 213 filed adversary proceedings, which is required to discharge student loans. Of the 213 student loan debtors who bothered to try, 51 received full discharges, 30 received partial discharges and 25 received an administrative remedy. Based on those numbers, it’s quite possible to discharge your student loans through bankruptcy. However, to get your student loans discharged for undue hardship, you must take action.
You Must Prove Undue Hardship for Student Loans to Be Discharged
Most individuals who file for bankruptcy file a Chapter 7 bankruptcy, which is detailed under Title 11 of the U.S. Code. It is what most people think of when they think of bankruptcy. Chapter 7 is a liquidation bankruptcy where debts are erased. Now here is why so many people think that student loans cannot be discharged in a Chapter 7 bankruptcy: Student loans are not automatically discharged in the way credit card debt is. But that is a far cry from not being able to get student loans discharged at all. You just have to work for it a bit and prove to the court that if your student loans are not discharged, it will cause you “undue hardship”.
If you want to get your student loans discharged, you will need to file a lawsuit against your student loan holder in an adversary proceeding as part of the bankruptcy process and show that paying your student loans would expose you to undue hardship. You will have to present evidence of undue hardship, which you may do my producing supporting documents and records and calling experts. It doesn’t matter if your loans are with the government or a private lender; you still must show undue hardship to have them discharged in bankruptcy.
What Constitutes “Undue Hardship” for Discharge of Student Loans
The bankruptcy code itself does not specifically define “undue hardship,” for purposes of discharging student loans in bankruptcy, and courts vary by jurisdiction in the standards they use. That does not mean, however, that there are no guidelines.
The Brunner Test
One of the most common ways of determining undue hardship for purposes of discharging student loans in bankruptcy is what is known as the Brunner Test. You must meet three criteria to qualify for undue hardship under the Brunner Test.
- Poverty: If you must make your student loan payments, you will be unable to maintain a minimal standard of living.
- Additional circumstances: Your special circumstances are such that you are unlikely to be able to repay your loan for a significant part of the repayment period. This might be due to a disability or other health problem, but it need not be health-related.
- Good faith: You must show you made a good faith attempt to repay the loans. For example, you contacted your loan servicer to discuss your options and tried one or more options to repay such as changing to a different payment plan.
The Totality of the Circumstances Test
Some courts simply look at all your circumstances and decide whether you would suffer undue hardship if you had to repay your student loans. Under this test, you may not need to prove all the factors of the Brunner Test, and other factors could be considered.
There are other tests, and it all depends on your jurisdiction. Contact an experienced bankruptcy attorney in your area to learn about the test used in your jurisdiction.
Evidence to Support Undue Hardship
The Court is not going to just take your word that paying off your student loans will cause you undue hardship, and you will need to provide them with financial documentation and other evidence. As we have already explained, the tests that courts use to determine undue hardship vary by jurisdiction, and you will want to speak with your bankruptcy attorney to determine exactly what you will need. However, gathering the following information will give you a good start. Some of these will be relevant to you, and some are for people in specific situations.
- Tax returns
- W2 forms
- Bank statements
- Records of all monthly payments including utility bills and rent or mortgage,
- Credit card statements
- A detailed report of other necessary expenses such as food bills, clothing allowance and household maintenance. Start keeping receipts.
- Medical records and letters from your doctors if they are pertinent to physical disability or injury that limits your ability to work
- Documentary evidence of job loss if that applies
- Proof, possibly through your tax returns, of your number of dependents
- Documentation that you tried to repay your debt and worked with your loan servicer. Provide your monthly loan statements and proof of payments you made. Gather any proof that you changed repayment plans or took other measures to repay the loans. Make copies or screen shots of emails, keep a list of all phone calls, and provide the names of the lender representatives you dealt with. Keep track of dates and times when these communications occurred.
You may need to call expert witnesses depending on your circumstances. If you were injured and are unable to work, for example, you will want a doctor to testify to that in addition to producing your medical records.
How to Proceed
- The first thing you should do is to consult with a good bankruptcy attorney. Even if bankruptcy is only a distant possibility, it is good to get the advice of an attorney early on. Most attorneys will provide a free or minimal fee initial consultation. Bankruptcy attorneys have done all this a thousand times and can advise you of the burden of proof you must meet to prove undue hardship and the evidence you must provide. They know how to make the case and present the evidence. It is difficult but not impossible to proceed without an attorney.
- We have already discussed that under the Brunner test, you must make a good faith attempt at repayment. The reality is that courts are usually going to want to see this no matter the test used in your jurisdiction. So, before you file bankruptcy, speak with your loan servicer and try to arrive at a way to repay the debt, possibly a different repayment plan. This will stand you in good stead if you try to establish undue hardship later.
- Once you know what test your jurisdiction requires for proving undue hardship, talk with your attorney about how you can meet the standards. If you do not have an attorney, sit down and give this a lot of thought. You are not going to be able to convince a judge that paying your student loans would cause you undue hardship if you are driving a BMW and taking vacations to Aspen. Your attorney can advise you what may be permissible in your jurisdiction and in front of your judge.
- If it looks like you are going to file bankruptcy, speak with your loan servicer about whether they would consider not opposing your claim of undue hardship. Consult the guidelines issued by the Department of Education advising student loan servicers when not to contest a debtor’s claim of undue hardship. You should know these guidelines backwards and forwards before you speak with your loan servicer. However, be aware that it is unusual for a loan servicer to agree not to oppose you.
Cases Where Student Loan Debtors Proved Undue Hardship
There are many cases where debtors had their student loans discharged in bankruptcy because of undue hardship. These are just examples.
In Re Walker and the Totality of Circumstances Test
In In re Walker, the bankruptcy court approved discharging the debtor’s loan on the grounds of undue hardship under the totality of the circumstances test, because the debtor established she could not maintain a decent standard of living for her children if she was forced to pay her student loans. The lenders made the argument that Walker had too many children, and so should not be permitted an undue hardship discharge due to this lifestyle choice. The lenders lost.
Janet Roth and the Brunner Test
Janet Roth was initially turned down for student loan discharge, because the bankruptcy court found she had not established her evidentiary burden of showing undue hardship under the Brunner test. Janet had taken out $33,000 in student loans 20 years earlier, loans that had grown to over $95,000. She was 64 years old, unemployed, had chronic medical problems and had only a Social Security check of $774 per month as income. One would think she would be a model case for undue hardship, but she was not approved at the bankruptcy court level, because they believed she had not made a good faith effort to repay the loans. She had not tried to renegotiate them, obtain forbearance or get a disability discharge.
Janet appealed the decision and won. The appellate court said Janet had “made good faith efforts to obtain employment, maximize income, and minimize expenses” and had not sought a bankruptcy discharge “until many years after the loans were in repayment status.” This was a very close call, and it could have been avoided had Janet been more zealous in fulfilling the requirements of her jurisdiction’s Brunner test before filing bankruptcy.
Trump Administration’s Department of Education Under Betsy De Vos May Seek to Make Student Loan Discharges Easier
In the past, the Department of Education has been aggressive in pursuing student loans. Now there are signs that the standards debtors must meet to prove undue hardship may be relaxed. On February 21, 2018, the Department of Education issued a Request for Information in the Federal Register stating that it wants to ensure that student loan borrowers would not be inadvertently discouraged from seeking discharge of their student loans on the basis of undue hardship. The Department of Education is, therefore, seeking public comments on exactly what should constitute “undue hardship,” which we have already seen has never been defined by Congress and is currently defined in various ways by the courts. Consumer groups have criticized courts for defining “undue hardship” much too strictly in many cases.
Though the Department of Education does not have the authority to change the statutes – only Congress can do that – it can issue guidance on how “undue hardship” should be defined. This guidance would influence the lending institution actions and court decisions. It would also heavily influence how aggressively the Department of Education’s own attorneys litigate these claims.
Before issuing new guidance the Department of Education has invited the public to comment and add information on
- “Factors to be considered in evaluating undue hardship claims
- Weight to be given to any such factors;
- Whether the use of two tests results in inequities among borrowers;
- Circumstances under which loan holders should concede an undue hardship claim by the borrower; and
- Whether and how the 2015 Dear Colleague Letter should be amended.” (This letter provides current Department of Education guidance that is generally not considered to be friendly towards debtors.)
If you would like to comment, you must do so no later than May 22, 2018. You can comment by
- Going to the Federal eRulemaking Portal at regulations.gov
Mailing your comments to Jean-Didier Gaina, U.S. Department of Education, Office of Postsecondary Education, 400 Maryland Avenue SW, Washington, DC 20202-6110.
Can You Establish Undue Hardship?
Make no mistake, getting your student loans discharged through an adversarial action for undue hardship is not a shoo-in. If you’ve tried taking other steps to pay down your student loan debt and were unsuccessful, it’s worth a shot trying to prove undue hardship. You will have to be meticulous in following the test the courts use in your jurisdiction and in logically presenting evidence that establishes the requirements. But 40% or more of those who pursue an undue hardship claim for student loan discharge are successful. If you have substantial student loans, it may very well be worth the time and work involved.
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.