High Student Loans and Bankruptcy

Student Loan Forgiveness and New Trends in Bankruptcy Laws

Back in 1978, the federal government began altering the student loan bankruptcy laws. The Bankruptcy Reform Act was signed into law by President Carter and it prevented graduates from declaring bankruptcy within the five years following graduation. From this point onwards, bankruptcy laws continued to tighten on student loan holders. In 1998, another amendment to the Bankruptcy Code eliminated altogether the provision that had allowed for the discharge of student loan debt if the loan had been in repayment for over seven years. After the amendment, the only ground left for the discharge of student loans is undue hardship. To qualify for the undue hardship provision, a debtor must demonstrate that the failure to discharge the college loan debt would impose an undue hardship on the loan holder or his family.

There is no definition of the phrase undue hardship in the current United States Bankruptcy code." The courts have therefore been left to the task, and a Second Circuit case has become widely applied nationally. The case of In re Brunner sets out three different factors which a debtor must meet in order to obtain a discharge of Educational loan debt. They are: Poverty Level--A bankruptcy court must determine that the debtors income, given his or her expenses will not allow them to have a minimal standard of living in the even he of she is forced to continue paying on the student loans,.Persistence--the court must find that the circumstances indicate the student loan holder's situation is unlikely to improve in the next 20 years. Generally, this will require the showing of a disability or some other life threatening situation. Acting in good faith--you as the one that owes the student loan must have made your absolute best effort paying the student loan debt in advance of filing for bankruptcy.

While most courts nationally, and locally in Oklahoma, still apply some version of the Brunner test, the recent student loan crisis has some judges questioning whether a reform is needed. At this time, most college graduates have accumulated nearly $30,00 in student loan debt. This debt is proving to be a significant burden for graduates, and some consider the lending, which is made without regard to the borrower's ability to repay the loan, irresponsible and overreaching.

In the recent Ninth Circuit case of In Re Roth, the appellate court reversed a trial court decision that the debtor had acted in bad faith because he did not initiate voluntary payments or attempt to obtain a forbearance. The court looked to the debtor's positive work history and years of making payments in reversing the trial court's findings of bad faith.

In his concurring opinion, Judge Pappas expressed the need for reform of current student loan bankruptcy laws. He stated his opinion that the courts should replace the Brunner standard with a more extensive totality of the circumstances test. This proposed standard of review will let the Bankruptcy Judge have more discretion in forgiving student loan debt.

Judge Pappas is not alone in calling for reform. Several other judges across the country have expressed concern over the student loan debt crisis and the currently restrictive bankruptcy laws. With education loan debt mounting and more debtors defaulting, it seems likely courts in the future will reconsider the Brunner standard and seek a more flexible test for discharging educational loan debt.

Bankruptcy can offer a means of escaping from oppressive debt and starting a fresh financial future, but is never something to be undertaken without thorough consultation with an attorney experienced in this area of law.