Legally reviewed by Allen A. Kolber, Esq. - The Law Offices of Allen A. Kolber, Esq., P.C.
Key Takeaways
- Student loans can be discharged in bankruptcy, but only through a separate adversary proceeding.
- New York courts apply the Brunner test, which requires hardship likely to persist, not a disability.
- Since 2022, government attorneys are directed to recommend discharge when your circumstances warrant it.
- Age, disability, long unemployment, an unfinished degree, or ten years in repayment each trigger a presumption in your favor.
- Some education debts fall outside the statute entirely and discharge without any hardship showing.
As of June 2024, approximately 43.2 million people were recorded to have student loan debt. This places student loan debt third among all household debts, falling behind mortgages and auto loans. This is all to say that you are not alone in your struggle to pay off your education. You are also not alone in your need to declare bankruptcy due to consumer debts like this one. With all that being said, please read on to discover whether you can discharge student loans in bankruptcy and how a seasoned Rockland County bankruptcy attorney at The Law Offices of Allen A. Kolber, Esq. can help you navigate your debts throughout these proceedings.
What Does a “Discharge” in Bankruptcy Mean?
Before anything else can be discussed, you must understand why many Americans feel inclined to file for consumer bankruptcies in the first place. Well, one of the most idealistic outcomes of bankruptcy proceedings is a discharge. Now, a discharge is a legal order made by the federal bankruptcy court handling your case that essentially relieves you, the debtor, from your obligation to pay off certain debts. In other words, this means it permanently prevents your creditors from conducting any collection activities against you.
Such an order is usually made a few months after your initial bankruptcy filing. Specifically, for Chapter 7 bankruptcy, this may take place after four months, or longer if your trustee needs to sell your nonexempt assets. And for Chapter 13 bankruptcy, this may go into effect after you complete all your payments within your promised three- to five-year repayment plan.
Is It Possible to Discharge Student Loans During Bankruptcy?
Now that you understand the concept of a discharge, you must know what types of debts qualify for it in your bankruptcy proceedings. Particularly, your student loan debt may be discharged. However, it is no easy feat.
As such, getting the court to agree to discharge your student loan debts typically requires you to show that repayment would result in undue hardship. This is to say that it would cause you to fall below the minimum standard of living for a significant portion of the repayment period. With this, you may have to provide sufficient evidence that you made diligent efforts to pay off this outstanding debt well before your bankruptcy filing date.
Plus, discharging your student loans may require you to undergo a separate court proceeding. Namely, you may need to file an adversary proceeding within your bankruptcy case. Simply put, this is similar to a lawsuit process in which your outstanding creditors and other third parties may dispute your student loan issues.
What Test Do New York Courts Apply?
The standard explained above has a name and its origins in New York. This comes from Brunner v. New York State Higher Education Services Corp., decided by the Second Circuit in 1987, which is the circuit that cases filed in Rockland County will proceed through.
However, one point worth noting is that the requirement that your situation is likely to persist is often described as requiring a disability, which is not what the case states. Any circumstances that indicate your finances are unlikely to improve can satisfy it.
How Has This Process Changed Since 2022?
In November of 2022, the Department of Justice, in conjunction with the Department of Education, issued guidance that impacts how the government responds to these cases. Government attorneys are now directed to stipulate to the facts demonstrating undue hardship and recommend discharge when a borrower’s circumstances warrant it, rather than contesting all requests.
Borrowers must complete an attestation form that details their income, expenses, and repayment history. Expenses will then be measured against IRS collection standards, rather than what the judge assigned to the case believes to be reasonable.
Partial discharge is also an option if you can afford some of the repayment.
Circumstances That Are Presumed to Persist
The guidance will tell the government attorney to presume your inability to pay will continue if:
- You are over the age of 65
- You have a chronic injury or disability that impacts your earning capacity
- You have been unemployed for at least five of the past 10 years
- You never obtained the degree the loan was used to pay for
- The loan has been in repayment status for at least ten years
While these presumptions may be rebutted, they are not the only way to satisfy this requirement.
What Counts as Good Faith?
Evidence of good faith commonly includes:
- Making a payment
- Applying for deferment or forbearance
- Applying for an income-driven repayment plan or consolidation loan
- Responding to a servicer
- Meaningfully engaging with the Department of Education
Failing to enroll in an income-driven plan will not, by itself, defeat your claim, as the government acknowledges those plans were often poorly explained or unfairly denied. The pause on payments between March 2020 and December 2022 will not be counted against you either.
When Is a Loan Not a “Student Loan” at All?
Certain debts that feel like student loans may fall outside of this statute, and these are generally dischargeable like any other standard debt, meaning you will not have to prove hardship. This may apply if:
- The amount you borrowed exceeded the cost of attending the college or university
- The funds went directly to you rather than the college or university
- The school was not an eligible institution
- The money paid for an unaccredited program, a non-degree course, or vocational or exam preparation training.
Whether yours qualifies is fact-specific and worth raising before assuming hardship is your only route.
Contact an Experienced New York Bankruptcy Attorney Today
To learn more about how to handle your student loan debt, don’t hesitate to discuss your circumstances with a competent Rockland County bankruptcy attorney from The Law Offices of Allen A. Kolber, Esq. Better yet, contact us today to schedule your free initial consultation with our firm.
