Explaining the New Bankruptcy Discharge Process for Student Loan Borrowers

Person adding up student loan debt on calculator

Over 42.8 million Americans have student loans, making it one of the most common forms of debt in the United States. While the amount of student loan debt has increased in recent years, it remains one of the most challenging types of debt to discharge through bankruptcy. However, the Department of Education recently reformed its policies to make the discharge process easier and more accessible to student loan borrowers. In this guide, we’ll explain everything you need to know about the new bankruptcy discharge process for student loans. 

Adversary Proceedings and “Undue Hardship”

In order to be considered for student loan discharge, individuals must initiate a separate lawsuit within their bankruptcy case called an “adversary proceeding”. During this process, the debtor is essentially suing the student loan lender. To do so, however, the debtor must demonstrate that he or she is experiencing “undue hardship” as a result of the loans.

Prior to these policy changes “undue hardship” was an undefined term in the bankruptcy code, which made it challenging for courts to judge each case by universal standards – leaving a lot of room for interpretation. 

In the past, most courts used something called the “Brunner Test” to determine who qualified for student loan discharge. This test was originally created in a 1987 court case during which a woman attempted to discharge her student loans less than a year after earning her degree. The goal of the test was to deter individuals from rushing into bankruptcy immediately after graduating, and it includes three questions:

  • Have you made a good-faith effort to repay the loans?
  • Are you unable to maintain a minimal standard of living while making the payments?
  • Is your financial situation likely to persist?

If the answer to each of these questions is “yes” and is supported by extensive evidence, then the loans can be discharged. 

On the surface, this may seem like a great system for discharging student debt. However, adversary proceedings are lengthy and costly, and they often weren’t successful because the requirements to pass the Brunner Test were still highly variable. Over time the test became increasingly difficult to pass, and many legal experts think it is now close to impossible to have loans discharged through this method.

How New Policy Changes Make Student Loan Discharge More Accessible

Debtors are still required to initiate an adversary proceeding within their bankruptcy case in order to be considered for student loan dischargeThe recent policy changes will ease the process by:

  • Setting clear standards for what is considered “undue hardship”: The current process uses arbitrary methods to review evidence and determine whether the debtor is experiencing undue hardship. According to the Department of Justice’s recent press release, the new process will include a thorough review of the debtor’s financial situation against concrete standards. These standards will be based on data provided by the Department of Education, along with other information that could contribute to undue hardship. This will ensure each debtor is judged fairly, without room for subjectivity.
  • Allowing for partial discharge if appropriate: Historically, student loans were either completely discharged or left entirely intact. The new policy changes allow for partial discharges depending on the debtor’s financial situation, which will make relief more accessible to those who are struggling with student loans. 

Considering Bankruptcy?

If you are overwhelmed with debt and need relief, don’t hesitate to contact the knowledgeable bankruptcy attorneys at OlsenDaines. Whether you’re dealing with significant student loans or other types of debt, we can assess your situation and help you determine the best course of action to regain financial stability. With over 40 years of experience serving individuals and businesses throughout the state of Oregon, we know how to help you with everything from foreclosures to creditor harassment. Whatever you’re facing, we can help. Just give us a call today to schedule your free legal consultation.

Bankruptcy and Student Loans

Ahh, the American dream. You start with nothing, get an education, work your assets off, and end up rich and successful. But is that really how it goes? Everyone knows that it is absolutely critical that you get a good education in order to get ahead. The average price of a college education can range anywhere from  $24,610 to $49,320! So what happens when you have little to no money yet need a college education or advanced degree to live the American dream? Many times, you take out student loans. And sometimes you end up living the American nightmare instead of the American dream. You find yourself drowning in student debt and despair.

Does that mean that you are you destined to drive a truck, work in the factory, be a farmworker, waitress, or work construction forever? Or that you have to always live near the poverty line in order to pay back your student loans?

We don’t think so. We believe that the poor should have access to good financial advice and be empowered with the financial information they need to not be taken advantage of when it comes to student loans or anything else.

Student Loan Debt.

We know that it is difficult to discharge student loan debt in bankruptcy. Most debtors won’t be able to discharge student loan debt through a Chapter 7 or Chapter 13 filing. But that does not mean you don’t have any options or possibilities.

The Undue Hardship Test.

Most courts are reluctant to discharge student loan debt. However, if you can qualify for the “undue hardship” exception, you may get your student loans discharged in bankruptcy. To qualify for undue hardship in Oregon, you have to be able to prove to the court that:

  • You have no money left over each month to pay your student loans
  • Your money problems aren’t going to get any better in the future
  • Over the years, you made a good faith effort to repay your student loans.

If you can answer these and other questions honestly, you may be able to qualify to have your student loans discharged.

Defenses to Student Loan Debt.

Another possible source of relief from student loan debt lies in unfair and illegal treatment. If you have defenses, such as a breach of contract, unfair business practices or fraud against your loan companies, you may not have to pay the debt at all.

Learn Your Options.

When it comes to student loan debt, there is no magic wand you can waive to get rid of them. But that does not mean you do not have hope or options. We are Oregon and Washington bankruptcy attorneys. We offer free consultations and we can help you. To set up an appointment, call us toll free at: 1-800-682.9568.

Can’t Pay Student Loan Debt? Here Are Your Options

If you have not looked at the subject in a while, you may be unpleasantly surprised when you learn about the current state of college tuition costs. The College Board has compiled some very meaningful statistics that shed light on the subject. During the 2016-2017 school year, the average annual cost for private college tuition was over $33,000. The average tuition charge for a public university was about $9600 for in-state students, but that figure skyrocketed to almost $25,000 for students from out-of-state who are attending public institutions of higher learning.

The cost of a college education is considerable, but at the same time, the price that you will pay if you go through life without an educational underpinning will probably be much more significant. However, when you digest these tuition figures (and they don’t include living expenses and supplies), you can understand why so many students accumulate significant student loan debt. According to Forbes, the average amount of student loan debt that was being carried by students in 2016 was just over $37,000. Of course, this is the average, so some students owed much more.

Can Bankruptcy Help?

Many students who graduate from college don’t earn enough money to keep their student loan payments current. Plus, there are individuals who are carrying student loan debt who never actually graduated. It would make sense to assume that you could file bankruptcy to wipe away your student loan debt, but in fact, bankruptcy is rarely going to be an option. Student loan debts are not discharged through a Chapter 7 or Chapter 13 bankruptcy filing unless you can prove that paying the debts would create an undue hardship for you. Very few people will be able to convince the court that they are in this position.

Outside of Bankruptcy

There are a few actions that you can consider if you are drowning in a sea of student loan debt. A lender may grant you a deferment or a forbearance that would suspend your payment plan for a temporary, agreed-upon interim. Plus, a number of federal student loan forgiveness programs exist, and this is an avenue that is worthy of exploration.

Schedule a Consultation Today

If you would like us to review your financial situation, including your student loans, we would be glad to provide a free case evaluation. We have offices in many different cities in Oregon including Eugene and Portland, and we also have locations in the state of Washington. To set up an appointment, send us a message through our contact page.