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Rethinking Bankruptcy And Student Loans

Posted on in Bankruptcy

According to a bankruptcy judge in New Jersey, it is time to re-evaluate the way current law deals with student loan debt. In a recent article, Judge Michael B. Kaplan called burgeoning student loan debt a looming crisis that touches every generation of Americans. Although the Bankruptcy Code largely lives up to its purpose of providing debtors with a fresh start, student loans are the notable exception to this rule.

Judge Kaplan rightly explains that it was not always this way. Prior to 1978, student loans were fully dischargeable in a consumer bankruptcy, just like any other unsecured debt. Then, Congress slowly began eroding this protection, most notably in the Higher Education Amendments of 1986. That law stated that student loans could only be discharged after a showing of “hardship.” The statute did not define the term.

Current Law

That ambiguity set the stage for the 1987 Second Circuit decision Brunner v. New York State Higher Education Service Corporation. The court adopted a very rigorous test to determine if student loans were dischargeable in a bankruptcy. Under the Brunner Rule, the debtor must show:

  • Standard of Living: The debt must be so high that the debtors cannot provide a “minimal standard of living” for themselves or their dependents.
  • Permanent: The condition preventing repayment cannot be a temporary job loss or medical condition.
  • Repayment Effort: The debtor must have demonstrated a good faith effort to repay the loans.

Ms. Brunner had about $9,000 in student loans and filed Chapter 7 Bankruptcy only seven months after graduation, so the court was probably right to deny discharge in this particular case. But the Brunner Rule has become entrenched in the law, and the Rule has some problems that a bankruptcy lawyer may be able to use to your advantage.

First of all, it is mutually exclusive. How can a debtor show both a financial hardship and a good payment history? Second, the Rule doesn't account for the huge debts that most graduates must repay. There is a great deal of difference between $9,000 and $100,000 – Ms. Brunner's graduate school debt and the average amount in 2014.

Though it is an uphill battle, your student loans may still be dischargeable in bankruptcy. Contact Newland & Newland, LLP, for a free phone consultation with an experienced Crystal Lake bankruptcy lawyer who can help you get a fresh start. We have six office locations in the Greater Chicago area.

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