Does Bankruptcy Eliminate Student Loans?

Using Bankruptcy to Eliminate Student Loans

Unless lawmakers take other action, the temporary coronavirus student loan forbearance program is set to end on September 30, 2021. At that point, student loan borrowers who have been skipping payments for over the past year must somehow find the money to meet these obligations. As the COVID-19 economic crisis persists, that won’t be easy to do.

In terms of bankruptcy law, student loans are unsecured debts, like medical bills and credit cards. Before 1980, student loans were always dischargeable in bankruptcy. But then, Congress added an “undue hardship” provision to this portion of the Bankruptcy Code. Pro-lender law quicky developed, and as a result, many student loan borrowers do not think bankruptcy is an option.

As outlined below, that’s normally not the case. In almost all jurisdictions, a generous partial discharge is usually available. Additionally, in many jurisdictions, a full and almost immediate discharge in a Chapter 7 bankruptcy might be on the table.

The Brunner Rule

That pro-lender law included In Re Brunner (1985), a still-controversial decision from the Second Circuit. Marie Brunner, who had made no effort to repay about $9,000 in student debt, asked the Bankruptcy Court to discharge it. The court denied her request and further stated that the debtor only had an “undue hardship” if:

• The debtor cannot repay the loan and maintain a minimal standard of living,
• This situation would persist for the life of the repayment term, or at least most of it, and
• The debtor had previously made a good faith effort to repay the loan.

Essentially, the Brunner rule, which almost immediately became the majority rule in the United States, limits student loan discharge to cases which involve a physical disability that did not occur until after the debtor graduated from school. Even then, discharge is not guaranteed, mostly because of the minimal standard of living requirement (i.e., a net income above the poverty line).

The Eleventh Circuit, which includes Georgia, has shown little interest in revisiting the Brunner rule, even in light of the current student loan crisis. So, many Georgia bankruptcy lawyers do not bother to file a motion seeking discharge. However, as one of our law school professors stated, you do not get anything unless you ask. Many people who ask at least receive a partial discharge, mostly thanks to the mediation process.

Totality of the Circumstances

In the neighboring Fourth Circuit, which includes North Carolina, South Carolina, and Tennessee, the law is different. In Erbschloe v. U.S. Department of Education (2013), a Fourth Circuit panel relaxed part of the Brunner rule. This decision opens the door for arguments concerning the totality of the circumstances test, a minority rule which is quickly gaining traction.

As the name implies, the totality of the circumstances test takes all loan and repayment circumstances into account, and all these factors have roughly equal weight. So, a bankruptcy attorney only needs to find one factor which is compelling, and press that issue before the court.

If your client is unwilling to commit to this course of action, mediation is also appropriate. A negotiated settlement, which usually includes a partial discharge, might be better anyway, since a bird in the hand is normally worth two in the bush.

Bankruptcy Mediation

If the bank objects to a motion for student loan discharge, which is a near certainty, a Georgia bankruptcy lawyer can file a motion for mediation. Judges normally grant such requests.

During mediation, both parties have a duty to negotiate in good faith. This phrase is rather ambiguous, but it normally means that each side must compromise in order to reach an agreement. In other words, if the bank takes a hard line “sorry Charlie” approach, claims the debt is not dischargeable, and refuses to budge, the judge, who will probably not be too happy, will most likely intervene.

A split-the-difference 50 percent discharge might not be available, but a noticeable 30 percent discharge is probably available. Additionally, everything is negotiable during mediation. That includes loan repayment terms, such as the interest rate. As a result, the client could save even more money.

Christopher Ross Morgan

Christopher Ross Morgan, who has helped bankruptcy clients since 1997, is a principle in Morgan & Morgan, a consumer bankruptcy law firm based in Athens, Georgia. The firm also practices disability and workers’ compensation. Click here for more information.