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The mantra is repeated over and over: You can’t discharge student loans through bankruptcy. However, while it’s reality for most indebted people, the conventional wisdom isn’t quite true.In a seldom-invoked provision, people in extreme circumstances can jettison their student loans if they can prove to a judge they face “undue financial hardship.”
In order to qualify, a debtor must pass what is known as the Brunner test, stemming from a 1987 federal appeals court decision, which carries three conditions:
- 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 loans
- Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans
- The debtor has made good faith efforts to repay the loans.
Historically, consumers have found it extremely difficult to meet the requirements. “Unless it looks like you are a functional quadriplegic for example, or maybe have bipolar disorder and can never work and are completely disabled for the rest of your life, you are not deemed to have this condition of hopelessness,” says David Leibowitz, a bankruptcy attorney in Wisconsin and Illinois.
Debtors used to be able to discharge student loans through the normal bankruptcy process just like most other debts. However, in 1976 Congress passed a law restricting loans from discharge, if undue hardship couldn’t be proven. Curiously, legislators never bothered to specify what undue hardship meant, leaving it up to the court to define.
“The second circuit adopted this Brunner test, and it was adopted by most of the other appellate courts and therefore binding on the bankruptcy courts in the rest of the country,” Leibowitz explains.
The question of unpaid student loans becomes more and more pressing as the costs of education soar, while the job market lags far behind. Total student debt in the United States has surpassed $1 trillion, more than credit card debt, with an average of $17,000 per person in 2011. Some 5.9 million people are at least a year behind in their payments, and almost one in six borrowers is in default.
For those who can’t make their payments, the debt will follow them for the rest of their life, and can even cause their social security payments to be docked.
With so much money in play, the stakes are high. On one hand, lenders—to say nothing of the federal government—are depending on the money being paid back. On the other hand, consumers are drowning under the debt with few viable ways to escape it.
“The entire financial community and entire consumer community is looking to see what will happen,” Leibowitz says. “It’s a very harsh environment.”
Undue hardship, while offering potential relief from perpetual debt, has such a forbidding reputation that many people don’t even bother to try. According to The New York Times, fewer than 1,000 people a year try to bring undue hardship cases, with no hard statistics as to how many are successful.
A survey by the National Association of Consumer Bankruptcy Attorneys from last winter found that 94 per cent of attorneys questioned found that few to none of their clients would be likely to meet undue hardship requirements.
Two academic studies, however, found that for undue hardship cases that are actually brought to court, the chances of success aren’t as dismal as they appear. The studies found that between 39 per cent and 57 per cent of people who applied for undue hardship were granted full or partial discharge of their student debt.
The process is expensive, time-consuming and has no guarantee of success (though a good bankruptcy attorney can help) — but for former students facing the direst of circumstances, there is at least some hope to jettison their crippling loans.
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