Filing for Bankruptcy? You Can Also Opt Out of Your Student Loan Repayment
Have you ever chatted with someone with so much debt that they feel overwhelmed? “Maybe I’ll just file for bankruptcy,” they might say. But then the inevitable caveat: “Although I still have student loans.”
Student loans have such a reputation, when someone submits an application for bankruptcy for Chapter 7 or 13, we just assume that it is impossible to pay off the loan if you decide to apply.
But while proving that your student loans should be repaid is not straightforward, they can be canceled during bankruptcy proceedings.
And it could get easier in the coming years.
What Excessive Difficulty Really Means
In order for your federal or private student loans to be canceled in the event of bankruptcy, you must file a separate lawsuit case along with your bankruptcy filing. You have to pass what is called the over-difficulty test.
This is not a written test, but a method of checking your finances to determine if your loans are worth paying off.
The Department of Education lists the following benchmarks for the Brunner test, the over-hardship approach most often used in bankruptcy court. You need to hit all three:
- If you are forced to repay the loan, you will not be able to maintain the minimum standard of living.
- There is evidence that these difficulties will continue for much of the loan repayment period.
- You have made a good faith effort to pay off the loan prior to filing for bankruptcy.
If it is clear that you are in unreasonable difficulty, your loan may be repaid in whole or in part, or the terms of your loan may be adjusted to make it easier for you to make payments.
The rule is so strict – but rather vague at the same time, isn’t it? – that it is generally understood that if you file for bankruptcy, you still have to pay off your student loan debt. “Not only in every state, but [also] in every jurisdiction, there will be different standards in determining whether the Brunner test applies,” said Leslie Tyne , an attorney specializing in debt settlement.
In fact, only 0.1% of student loan borrowers who filed for bankruptcy are trying to pay off their student loans, according to a 2011 study by Villanova University School of Law. But Jason Iuliano, a Villanova researcher, also found that of the small proportion of bankruptcy applicants who filed for student loan repayments, about 40% succeeded. And that figure is growing, he told NPR .
Is the system not working?
Anti-bankruptcy student loan borrowers have their roots in the 1970s, according to CNBC . At the time, borrowers had to wait at least five years after they started paying off their loans to file for bankruptcy, so people didn’t take out a bunch of loans just to ask them to be written out once they graduated. In the 1990s, this waiting period was increased to seven years. Since 2005, there has been no waiting period at all: you just have to prove that you are experiencing unreasonable difficulties.
But this method may not work for today’s debt-ridden student loan borrowers.
The 2019 Student Borrower Bankruptcy Law was introduced to the Senate last May with the backing of a whole bunch of Democrats (including presidential candidate Elizabeth Warren) and one independent (presidential candidate Bernie Sanders). But the bill stalled in committee as the law on higher education, which is one year earlier stalled in the House of Representatives committee.
Warren, for example, doesn’t want to wait for Congress to loosen student loan rules. In her latest plan to revise higher education spending, she wrote that until Congress decides, she will instruct her administration to “stop getting in the way” of borrowers seeking help in this way.
The recent bankruptcy case that could have changed everything
Kevin Rosenberg , a Navy veteran, took out student loans for a bachelor’s degree and then a law degree. He did not stay in the legal profession after passing the bar exam and starting a career, but continued to pay off student loans. In 2005, after he pooled his loans, his balance was about $ 116,000. By 2019, his loans exceeded $ 221,000.
The judge paid off the loans. “For a multitude of applicants, such as Mr. Rosenberg, who have been out of school and struggled with student loan arrears for years, the test itself is pretty straightforward and straightforward,” Chief Bankruptcy Judge Cecilia J. Morris wrote last month. … “The harsh results that are often associated with Brunner are actually the result of instances where Brunner is being interpreted,” she wrote , referring to the original solution, which she called the test of difficulty.
She explained that Brunner’s test was, in fact, overblown, relying on the idea of ”hopelessness” rather than overt difficulties. “This court will not participate in perpetuating these myths,” she wrote.
“This case is an important statement on the link between student loans and bankruptcy,” Tyne said. While bankruptcy should be a last resort for student loan borrowers and others with serious debt, “you can consider bankruptcy if you feel you have exhausted your options and cannot make payments without compromising the minimum standard of living.” said.
And since this decision directly challenges the idea that your student loan debt persists even after bankruptcy, the assumption may begin to change in the coming years. This does not mean that hordes of borrowers will go to bankruptcy to get their student loans. But those who do so may find it easier to defend their position, in part because of the precedent this public case set in favor of firing.
If you take this route
“Bankruptcy should be a last resort when trying to manage your student loans,” Thain warned. “If you are considering bankruptcy, you should consider consulting a financial lawyer.”
She explained that some financial attorneys would help find alternatives to bankruptcy; If bankruptcy is truly your best option, they will help you pay off your loans as efficiently as possible.
“A reputable bankruptcy attorney will be in your best interest and will only charge you after work has already begun,” she said.