More Borrowers Are Getting Student Loan Debts Discharged in Bankruptcy

• Author: Monica Jackson
• Posted: 2024-08-02

One of the cardinal rules of bankruptcy in the past had been that student loans do not get discharged except for a very small set of circumstances. This means that people considering bankruptcy and expecting a full fresh start in life were disappointed to know that they would still be carrying student loan obligations, even after their bankruptcy was finalized. Now, there are some cracks in the armor of that legal doctrine. Some courts are starting to find ways to help debtors get out of their student loans in a bankruptcy proceeding.

Court Decisions Are Chipping Away at Longstanding Rules

Courts in many states are beginning to chip away at a rule that was almost previously ironclad. Three different courts in different parts of the country have issued ruling that have allowed for student loan discharge. The previous test was referred to as the "Brunner Test," taking the name from the case in which it originated. The court looked at several factors to consider whether requiring the debtor to keep paying their student loans represented an "undue hardship" on the borrower. In nearly all cases, courts would conclude that the debtor would still need to keep paying their student loans. Discharge became so rare that many bankruptcy attorneys advised their attorneys not to even try it in court.

However, some judges are starting to recognize that we live in different times. Even when changes were made to the bankruptcy laws back in 2005 to make discharge more difficult, we were still living in different times. Now, it seems like a large part of the country is swimming in student loan debt that will stay with them for decades. At the very minimum, judges are finding more flexible ways of applying the factors in the Brunner test that result in the discharge of debt.

Congress May Also Change to Rules in Favor of Borrowers in the Future

Not only are courts beginning to loosen up this doctrine, but Congress is beginning to consider taking action too. Student loans are at the forefront of people's consciousness given the sheer amount of money that people owe. The House has proposed a bill that would allow for the discharge of student loan debt in more cases. It would likely not pass the current Senate, but a change in control in Washington could mean that there is more relief and help for people who owe money for their education. Some student loan forgiveness is already on the legislative agenda if Joe Biden wins. Now, Congress may pass this bill to allow for more bankruptcy relief for those who owe money.

While bankruptcy may not be a preferred option for most people, it is necessary in many cases. However, the fact that borrowers are still tied to their student debt limits the effectiveness of the relief. Courts and Congress are now beginning to realize that public policy may dictate a different result and are making some changes. One would overturn the 2005 law that made it nearly impossible to obtain debt discharge.

For debtors, the hope is that more federal courts will start to look at the new cases allowing for discharge as precedent. While this will not give a blanket discharge to all debtors, at least it will serve to loosen the rules while Congress takes its time to act.

In the meantime, those who owe student loans and are going through bankruptcy can at least try to make a showing that their debt should be discharged. They should argue to the court for a more flexible application of the Brunner test and hope that the judge in their case understands what they are going through and believes that times have changed. They should still be prepared to show the measures that they have gone through to pay their student loans and be able to demonstrate the hardship that it has caused them.

In addition, borrowers should also try to show that they have made all efforts to try to pay their student loans and continuing to pay them would cause them extreme hardship. In other words, now at least it makes sense to try to see if their circumstances can meet the Brunner Test. What is certain is that the landscape for student loan debtors is changing, and borrowers may get more help from courts and Congress if they are struggling under the weight of their debt.