Bankruptcy

Lesson 71: Bankruptcy and Student Loans

Bankruptcy and student loans involve a complex interplay of laws and legal precedents. This lesson explores the treatment of student loan debt in bankruptcy proceedings under the Bankruptcy Code, strategies for handling student loans, and the criteria for discharging student loan debt.

Special Issues in Bankruptcy

Student loans are classified under non-dischargeable debts in most bankruptcy cases. However, there are specific conditions under which student loans can be discharged.

Important! Student loans are typically non-dischargeable unless the debtor can prove "undue hardship."

Undue Hardship Standard

To discharge student loans, debtors must demonstrate undue hardship. Courts commonly use the Brunner Test to determine undue hardship. The three prongs of the Brunner Test are:

Poverty: The debtor cannot maintain a minimal standard of living if forced to repay the loans.
Persistence: The circumstances that prevent repayment are likely to persist for a significant portion of the repayment period.
Good Faith: The debtor has made good faith efforts to repay the loans.

Adversary Proceedings

If a debtor believes they meet the criteria for undue hardship, they must file an adversary proceeding within the bankruptcy case. This is essentially a lawsuit within the bankruptcy to obtain a court judgment declaring that the student loans are dischargeable.

The following diagram illustrates the process of discharging student loans through an adversary proceeding:

graph TD; A["Filing for Bankruptcy"] --> B["Adversary Proceeding"]; B --> C["Court Evaluation of Undue Hardship"]; C --> D{"Meets Undue Hardship Standard?"}; D -- "Yes" --> E["Student Loans Discharged"]; D -- "No" --> F["Student Loans Not Discharged"];

Strategies for Managing Student Loans in Bankruptcy

Even if student loans are not discharged, bankruptcy can still provide relief through strategies such as:

Reorganizing other debts through Chapter 13 bankruptcy, potentially freeing up resources to pay student loans.
Negotiating with lenders for more manageable repayment terms.

Case Law and Precedents

Several notable cases have shaped how student loans are treated in bankruptcy, including:

Brunner v. New York establishing the Brunner Test.
Long v. Educational Credit Management Corp. addressing partial discharge of student loans.