In persons over the age of seven years, there is a strongly held belief that there really isn’t a Santa Claus living at the North Pole. There seems to be, among this same group, a strong belief that a debtor simply cannot discharge their student loans in bankruptcy. While, I cannot bring happy tidings about rumors of the demise of the jolly old elf, I can offer hope to severely financially distressed people that, while difficult, it is indeed possible to discharge student loans or at least a portion of them. Yes, Virginia, you can dump your student loans…. maybe.
Can Student Loans Be Discharged?
The belief that student loan’s are not dischargeable is an honest one. It comes from the fact that it is still quite difficult to obtain a discharge. In fact, for most people, it really is next to impossible. But, for people who, despite their best efforts cannot find or keep gainful employment with an income that will allow them to survive are very unlikely to ever be able to pay their loans. For these people, those who need it most, there is hope, that that bulge in their Christmas stocking is not a lump of coal after all. For those truly in need, for those Virginias, that is like Christmas.
The relevant parts of Bankruptcy Code § 523(a)(8) clearly states:
“A discharge … does not discharge an individual debtor from any debt—unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for … an educational benefit overpayment or loan made…”
What is Undue Hardship?
What is an “undue hardship”? The Bankruptcy Code does not provide a definition of “undue hardship.” The courts are have been left to make that determination. The Court will look to you to give them the proof they need to make that determination. So, it is the responsibility of the debtor and their attorney to convince the court that the debtor will endure an undue hardship unless they are relieved of the debt, at least in part.
The Brunner Test
In Michigan, and in the other courts within the Sixth Circuit, the Bankruptcy Court will apply the “Brunner test”. Under the test established in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. N.Y.1987), a debtor must establish an “undue hardship” by proving three things.
First, the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans.
In examining whether the Debtor can maintain a minimal standard of living if forced to
repay the loans, the Court must determine that the debtor is actively minimizing her living expenses and debtor is trying maximizing her income potential. A debtor is not required to live in abject poverty, but she must make significant lifestyle adjustments. To satisfy this condition the debtor must demonstrate that she is making a strenuous effort to maximize her personal income within the practical limitations of her vocational profile.
Second, the debtor has to show that her condition is more or less permanent. She can do this by evidence that shows that she has other life circumstances that indicate that her current state of financial affairs is likely to persist for a significant part of the remaining loan repayment period.
And, third, the debtor has to show the Court that, before asking the court to discharge the debts, that the debtor has made good faith efforts to repay the loans. This can be done by making payments before the bankruptcy, or even by making payments through a prior bankruptcy.
Discharge: All or Nothing
In the end, the discharge of student loans is not an all or nothing proposition. Even if you cannot establish a permanent condition, debtors who can establish that their harsh condition will continue to exist for a long time but not permanently so, may still be able to obtain a partial discharge. Bankruptcy courts have the power to fashion an equitable remedy short of discharging a debtor’s entire education loan.
Of course, the devil, or should I say, the elf, is in the details. Establishing the existence of a permanent hardship is a difficult task. For that reason, it is important that debtors get the expert help that they need from their bankruptcy attorneys at Resnick & Moss, P.C. to help them to document their own hardships and to present the case to the Court in the most effective and compelling way. If you have student loans and you cannot make ends meet now or for the foreseeable future, please contact us at Resnick & Moss, P.C. at (248) 642-5400. And, don’t wait until December.
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