Persons seeking relief from their student loan debt can try their odds in bankruptcy court. Congress has allowed debtors to get out from under their student loans only upon a showing of “undue hardship”.  Only a small percentage of debtors in bankruptcy pursue student loan dischargeabilty complaints and of those less than half are successful.

The relevant bankruptcy code section is 11 U.S.C. Section 523(a)(8).

Which allows a discharge of a 1)“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 2) “any other educational loan that is a qualified education loan” as defined by the IRS Code. A discharge would be granted if the debtor can show “undue hardship”.

To meet the undue hardship standard courts apply what is called the Brunner test. The Brunner test sets forth the required elements that a debtor must demonstrate to overcome the undue hardship standard.  A debtor must demonstrate three elements by a preponderance of the evidence: 1) the inability to maintain a minimal standard of living if forced to repay the loans; 2) any current and likely perpetual circumstances that would make repayment difficult; and 3) a good-faith effort to repay the student loans. All three must be proven for a bankruptcy court to discharge a student loan.

Step One: Prove Inability to Maintain a Minimum Standard of Living

Requires looking into one’s current financial condition to see if payment of the loans would cause one’s standard of living to fall below that minimally necessary.  Must look at current income versus current expenses- do the current monthly expenses including the student loan monthly payment greatly exceed the monthly income?

Step Two: Circumstances Make Repayment Now and Later Difficult

Requires showing that certain circumstances will persist into the future. Such circumstances will prohibit the debtor from repaying the student loans during the repayment period.  This can be the hardest element to prove as courts do not accept a present inability to pay. Instead there must be a “certainty of hopelessness”. Circumstances may include long-term physical or mental problems precluding employment, lack of marketable job skills, or the necessity of fully supporting dependents.

Step Three: Must Show a Repayment Effort

Requires showing that one has put forth a good-faith effort to repay the student loans.  Efforts may include trying to negotiate a repayment plan but also include efforts to obtain employment, maximize income and minimize expenses.

For more information on student loan dischargeability, contact David A. Arietta, Esq. at (925) 472-8000.