Can Student Loans Be Discharged in Bankruptcy?

The amount of Student Loan Debt in the United States has reached a crisis level. Many people are overwhelmed with Student Loans which sometimes exceed $100,000.00. Frequently, these Student Loan Borrowers didn't finish their Degree, received a Degree which doesn't afford them sufficient Earnings to pay the Student Loans or have a disability which prevent them from paying the Student Loans.

As a general rule, Student Loans are non-dischargeable. Until recently, if you were breathing and had an income, most Bankruptcy Courts weren't very keen on Discharging Student Loans. Over the past few years, however, there has been a major shift in the attitude of Bankruptcy Judges  towards dischargeability actions involving Student Loans.

Although the general rules haven't changed, the Courts have been applying those rules in a more liberal manner.  The Bankruptcy Code states that Student Loans are non-dischargeable unless they "impose an undue hardship on the Debtor and the Debtor’s dependents." See 11 U.S.C. Section 523(a). The seminal case, followed by most Courts interpreting this section of the Bankruptcy Code, set forth a standard for determining if a Student Loan imposes an "Undue Hardship" on a Debtor.  See Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987).  This standard has come to be known as the "Brunner Test." Id. 

The Brunner Test holds that Student Loans are dischargeable if the Debtor can satisfy a three-part test as follows:

(1)  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 Student Loans;

(2)  Additional Circumstances exist indicating this State of Affairs is likely to persist for a Significant Portion of the Repayment Period; and

(3)  The Debtor has made Good Faith Efforts to Repay the Student Loans.

The Court of Appeals for the Sixth Circuit, which is the Circuit encompassing Ohio where I practice, implicitly adopted the Brunner Test in the case of Cheesman v. Tennessee Student Assistance Corp., 25 F.3d 356, 359 (6th Cir. 1994), cert. denied, 513 U.S. 1081, 115 S. Ct. 731, 130 L. Ed. 2d 634 (U.S. 1995).

The Sixth Circuit further developed the Cheeseman case law when it held that the Dischargeability of Student Loans isn't an All-Or-Nothing Proposition. See Tennessee Student Assistance Corporation v. Hornsby, 144 F.3d 433 (6th Cir. 1998). Instead, the Hornsby Court held that a Bankruptcy Court should utilize Section 105(a) of the Bankruptcy Code, which gives Bankruptcy Courts broad discretion to enter Orders furthering the purposes of the Bankruptcy Code, to fashion a remedy that is equitable under the circumstances. This includes partially Discharging Student Loans, instituting a Repayment Schedule, Deferring a Debtor's repayment of the Student Loans or simply acknowledging that Debtors may Reopen their Bankruptcy Case at a later time to determine the Dischargeability of their Student Loans.  The Hornsby Court indicated that, even if the Student Loans don't rise to the level of imposing an Undue Hardship, the Bankruptcy Court is still free to find an equitable remedy that allows the Debtor to avoid repayment of the Student Loans in full or modify the repayment schedule.

There is also a Non-Bankruptcy solution to Discharging Student Loans available to Debtors who attended schools that closed which is known as the “Closed-School Discharge.”  To benefit from the Closed-School Discharge, a you must meet one of the following three tests:

(1)  You were Enrolled when your School Closed;

(2)  You were on an Approved Leave of Absence when your School Closed; or

(3)  Your School Closed within 120 Days after you Withdrew.

You can learn more about the Closed-School Discharge by visiting this website: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/closed-school

If you are overwhelmed with Student Loan Debt, call my office for a Free Consultation.  I will review you financial situation as well as any other circumstances which may help you Discharge your Student Loans in Bankruptcy. I have been Practicing Law for over 20 years and Bankruptcy is my Sole Area of Practice. I will help you find a Creative Solution to solve your Financial Problems and get you back on the Path to Financial Freedom.

I look forward to Helping You.

Greg Wetherall

Cincinnati Bankruptcy Lawyer

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