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A Brief Guide to Discharging Student Loans in Bankruptcy

If you’re crushed by student loans with no end in sight, you may have thought about bankruptcy.

But can you wipe out (or “discharge”) student loans in bankruptcy? Many people think you can’t. And most of the time, that’s true.

But for some, discharging student loans is possible — even if difficult. Here’s what you need to know.

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Student Loans and the Bankruptcy Code

Most types of consumer debt are dischargeable in bankruptcy. This includes debt like credit card balances, medical bills, and personal loans. But there are certain debts that you can’t discharge. Section 523 of the Bankruptcy Code lists these exemptions. In particular, Section 523(a)(8) covers student loans. It states that you can’t discharge the following debts unless you can prove undue hardship:

  • Educational loans made, insured, or guaranteed by the government;
  • Educational loans made under any program funded by the government or a nonprofit;
  • An obligation to repay an educational benefit, scholarship, or stipend; and
  • Private educational loans not exceeding cost of attendance at an eligible educational institution.

This list looks like it covers all student debt. But there are exceptions. For example, what if your school isn’t an “eligible educational institution”? (Eligible institutions are included on the Federal School Code List.) In that case, your private loans would be dischargeable. You don’t even need to prove undue hardship. That’s just how the law works. But what about the loans that are covered by Section 523(a)(8)? How do you prove undue hardship?

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Proving Undue Hardship Under the Bankruptcy Code

Proving undue hardship isn’t easy. This is partly because the Bankruptcy Code doesn’t define “undue hardship.” Instead, Congress left it to the courts to interpret. Most courts today use the Brunner test to determine undue hardship. A court first used the Brunner test in a 1987 case of the same name. This test requires you to show that: 

  • You currently can’t maintain a minimal standard of living if you repay your student loans;
  • Your financial situation is likely to continue in the future; and
  • You’ve made a good faith effort to repay your student loans.

Outcomes under the Brunner test are hard to predict. This is because each prong is open to interpretation. What, exactly, does “minimal standard of living” mean? Or “good faith effort”? How do you know if your situation is “likely to continue”? The answers to these questions vary from judge to judge. But there is a common thread: the bar for passing the test is always very high.

Some courts have recognized the flaws of the Brunner test. In 2003, the 8th circuit rejected its use. Instead, the court applied a “totality of circumstances” test, which considers:

  • Your past, current, and reasonably reliable future resources;
  • Your reasonably necessary living expenses; and
  • Any other relevant facts and circumstances.
  • In a 2010 case, the First Circuit BAP also opted to use the totality of circumstances test.

The totality of circumstances test looks more flexible than the Brunner test. In reality, it’s still difficult to pass.

Both tests are fact-specific and subjective. And in both cases, the results are hard to predict.

The Future of Student Loans in Bankruptcy

It’s possible that student loans will become easier to discharge in the future.  It is a hotly charged political issue, and in the present political climate it is impossible to predict.

Proving undue hardship wasn’t always required.  Before 1976, debtors could discharge student loans just like other consumer debt.[1] Then in 1976, Congress made government student loans non-dischargeable for 5 years, absent undue hardship. In 1990, Congress increased the waiting period to 7 years.[2]  Then in 1998, all government student loans became non-dischargeable absent undue hardship.[3] And finally, in 2005, Congress extended these restrictions to private student loans, too.[4]

Since the 1970s, tuition fees have skyrocketed, with student loan debt exploding in tandem. As of early 2019, student loan debt passed $1.5 trillion.  Yet, courts still use the Brunner test — unchanged since 1987.

Thankfully, government officials and lawmakers have started to notice the growing crisis. The Department of Education has shown interest in defining “undue hardship.” In the last decade, some lawmakers have also tried to make private student loans dischargeable again.

Most recently, lawmakers introduced the Student Borrower Bankruptcy Relief Act of 2019. If it becomes law, student loans would be treated the same as other types of unsecured consumer debt. You would no longer need to prove undue hardship to discharge them.  But for now, discharging student loans in bankruptcy remains challenging.

[1]   Education Amendments of 1976, Pub. L. No. 94-482, § 127(a), codified at 20 U.S.C. § 1087-3 (1976).

[2]   Crime Control Act of 1990, P.L. 101-647, § 3621(2), 104 Stat. 4789 (1990).

[3] Higher Education Amendments of 1998, Pub. L. No. 105-244, § 971(a) (1998).

[4]    Bankruptcy Abuse and Consumer Protection Act, Pub. L. No. 109-8, § 220, 119 Stat. 23, 59 (2005).  Private Student Loan Bankruptcy Act of 2013, H.R. 532, 113th Cong. (2013); Fairness for Struggling Students Act of 2011, S. 114, 113th Cong. (2013); Private Student Loan Bankruptcy Act of 2011, H.R. 2028, 112th Cong. (2011); Fairness for Struggling Students Act of 2011, S. 1102, 112th Cong. (2011); Private Student Loan Bankruptcy Act of 2010, H.R. 5043, 111th Cong. (2010); Fairness for Struggling Students Act of 2010, S. 3219, 111th Cong. (2010).


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