STUDENT LOANS, BANKRUPTCY, AND THE “HARDSHIP DISCHARGE”

Recently, we seem to be getting quite a few calls from prospective clients inquiring about the "hardship discharge" of student loans in a Chapter 7 bankruptcy authorized by Section 523(a)(8) of the US Bankruptcy Code at 11 U.S.C. It is worth noting that, prior to 1978, any and all student loans, government of private, could be discharged in a Chapter 7 bankruptcy. It wasn't until a legislative enactment in 1978 that made certain governmental student loans non-dischargeable. There were a few additional amendments to this exception along the way in 1979, 1984, and 1990, all aimed at adding further restrictions to the types of student loans that could be discharged in a bankruptcy. Then in 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Section 523(a)(8) of the US Bankruptcy Code at 11 U.S.C. was finally amended to except from discharge:

"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 an obligation to repay funds received as an educational benefit, scholarship, or stipend; or 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" unless excepting these debts from discharge "would impose an undue hardship on the debtor and the debtor's dependents.."(emphasis added).

In a nutshell, these amendments made all student loans, governmental or private, non-dischargeable, except in situations where not discharging the student loans would create an "undue hardship." It is this undue hardship "exception to the exception" that we address here.

The amount of student loan debt people seem to be incurring appears to be constantly increasing, and student loans payments are becoming more and more difficult for people to handle. Throw into the mix one of the worst economies in history with unemployment at an almost all-time high, and people are looking for a way out of their student loans. It is not unusual to speak with someone who, through researching bankruptcy on the internet, has come to learn of the "hardship discharge" and figures that they will qualify for this discharge since they are currently experiencing a "hardship" due to unemployment, working reduced hours, illness (temporary), etc.

This assumption is INCORRECT!!

To receive a hardship discharge of your student loans, you must be able to show not just hardship, but "substantial" hardship. To make this determination, most courts have adopted the test laid out by the court in Brunner v. NY HESC (In re Brunner), 831 F.2d 395 (2d Cir. 1987), aff'g 46 B.R. 752 (Bankr. S.D.N.Y. 1985),where you essentially must be able to show that you will never be able to earn an income sufficient to allow you to pay back some amount of your student loans. To meet the requirements of Brunner, you must be able to show that:

1. if required to repay the student loans, the Debtor would not be able to maintain a minimal standard of living for himself and his dependents

2. the circumstances show that this state of affairs is likely to continue for a very long time;

3. the Debtor has made good faith efforts to repay the loans;