The facts about student loans and bankruptcy.

Student loans are the bane of a generation. According to the New York Federal Reserve Board, there are currently 37 million student loan borrowers. Of those borrowers, the under-30 age group has 14 million student loan borrowers. Another 10.6 million borrowers are in the 30-39 age group. Student loans account for the most common form of increasing debt among ages 18-24 (54% have seen increased school loan debt). The Consumer Finance Protection Bureau reports that there are approximately 1 Trillion dollars in outstanding student loan debts. The Federal Reserve Board of NY states that, as of Quarter 1 in 2012, the average student loan balance for all age groups was $24,301.  About one-quarter of borrowers owe more than $28,000; 10% of borrowers owe more than $54,000; 3% owe more than $100,000; and less than 1%, or 167,000 people, owe more than $200,000.

Default rates are high and climbing. Statistics from the Institute for Higher Education Policy reports are stunning:

• Only about 37 percent of federal student loan borrowers between 2004 and 2009 managed to make timely payments without postponing payments or becoming delinquent.

• For every student loan borrower who defaults, at least two more borrowers become delinquent without default.

• Two out of five student loan borrowers – or 41%- are delinquent at some point in the first five years after entering repayment.

The statute of limitations on student loans is effectively nonexistent and student loan collections are growing more intense. Once you’ve consolidated your loans you’re ineligible to consolidate again. Lots of people are are unable to make even the minimal payments and face wage garnishment and other aggressive collection methods.

Can bankruptcy help?

Sometimes, bankruptcy is the answer. As a WNC bankruptcy lawyer, I help people who cannot pay their student loans.

Bankruptcy offers a broad discharge of debts. Unfortunately, the law carves out an exception for student loans. Student loans are not dischargeable unless:

excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—


(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” – 11 USC 523(a)(8)

Huh? This means simply that your student loan debts are not eliminated in bankruptcy unless they impose an “undue hardship” on you. Sounds easy to prove, right? Wrong.

Bankruptcy courts in all but one circuit rely on the so-called three-part Brunner test for determining whether a student loan is dischargeable in bankruptcy based on a claim of undue hardship.  This test is based on a thirty-year old U.S. Court of Appeals decision (Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987]). According to Brunner, the following must be proven in order for a debtor to discharge student loans:

(1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

Since the Brunner decision, undue hardship has become the only criterion for discharge of student loans in bankruptcy, and court interpretations of the three prongs have become increasingly stringent. Some courts interpret a minimal standard of living as the federal poverty level, even though it is acknowledged that in most urban areas a person whose income is below 150% of poverty level requires government subsidies (section 8 housing, Medicaid) to satisfy the most elementary needs of human existence. When the debtor has exhausted all possibilities for legally increasing his income, and has pared his expenses to the point where any further reduction would leave him homeless, without access to needed medical care, without transportation, or without the tools and supplies needed to generate self-employment income, and still cannot pay the interest on student loans, he is in precisely the sort of bind bankruptcy law at its most basic was intended to cure, yet, at least in the eyes of the student loan industry, this is still not “undue hardship.” (Thanks to Oregon bankruptcy attorney Kent Anderson for his concise and incisive summary, from which I drew liberally.)

In order to discharge student loans in WNC, you must first file a bankruptcy petition. Then, you file an “adversary proceeding” in your bankruptcy case in which you ask the Court to discharge your student loan debts based on the fact that repaying them would impose an undue hardship on you. While litigating, you must satisfy the Brunner test, a strict and arguably unfair set of requirements.

As an Asheville bankruptcy lawyer, I help people with their student loan debts. I have successfully eliminated student loans for multiple people who were otherwise imprisoned by staggering debts they could not pay. Please call us today if you are unable to repay your student loans. We may be able to help.