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Student Loan Debts & Dischargability 

The old saying, about death and taxes being the two certainties in life, is outdated.  These days, student loan debts are the third certainty.  No matter how much Americans plan and structure their finances, many seem destined to be saddled with debt. We’ve discussed this plenty of times on our blog before.  We’ve even published a glossary of common debt consolidation terms.  There can be any number of legitimate reasons why hardworking people fall into debt. There’s one thing which sets Mackey, Caswell & Callahan, P.C. apart and why our clients value our services.  That is, they know we understand both the causes of debt and the processes necessary to alleviate difficult financial situations.  We try to help our clients rebuild a solid financial future.

Fascinatingly, the sheer amount of student loan debts has now eclipsed many other forms of debt.  So much so that it has become one of the largest sources of debt in the United States. Among other things, this striking statistic demonstrates the value of an advanced education in a modern economy.  Unfortunately, it also demonstrates our utter lack of ability to control our own financial destiny.

Legislative Amendment to Prevent Abuse

Before student loan debt came to rival other major sources of debt, Congress amended the bankruptcy laws. It did so in order to make it very difficult to discharge student loan debt in bankruptcy. The reasoning behind the amendment essentially boiled down to the prevention of abuse.  Before it, many students in the United States were racking up large amounts of student debt.  They’d then simply file for bankruptcy immediately after finishing their education. In other words, Congress changed the bankruptcy law to stop that practice.  Its intent was to prevent dishonest students from financing expensive educations where there was no actual intent to repay loans. As it turns out, though, this amendment may have been premature.

The Law of Unintended Consequences

Today we’re experiencing record student loan defaults and an overall difficulty in coping with student loans by the millennial generation.  This growing problem hasn’t gone unnoticed by the federal government.  In late February, 2018, the U.S. Department of Education began to formally study the problem.  It issued a Request for Information on Evaluating Undue Hardship Claims in Adversary Actions Seeking Student Loan Discharge in Bankruptcy Proceedings.  The Request was published in the Federal Register.

Discharging Student Loan Debt

Student loan debt is largely exempt from bankruptcy discharge.  There is an exception, though.  The exception is if repayment imposes an “undue hardship on the debtor and the debtor’s dependents”. The usual test to prove “undue hardship” is the Brunner Test. It has three prongs:  1) poverty; 2) persistence; and 3) good faith.  They’re difficult to prove.

Proving Undue Hardship is Difficult

Discharging student loans is extremely difficult.  In consequence, future students should think very carefully before taking on such debt.  The Brunner test is named for a 1987 case from the Second Circuit U.S. Court of Appeals, Brunner v. New York State Higher Education Services Corp.  If all three Brunner prongs are met, the court will conclude that undue hardship exists.  In that limited circumstance, the court  will discharge the student debt. Specifically, the debtor must first show that repaying the student loan will result in poverty. The debtor must also show that their financial condition is not likely to improve in the near future.  Lastly, the debtor must demonstrate a continuing good faith effort to pay back the student loan.  If just one of these prongs isn’t met, the loan doesn’t qualify for discharge.

The Totality of Circumstances Test

Alongside the Brunner test, courts also frequently use something called the “totality of circumstances” test. This test takes into account all relevant factors of the debtor’s situation.  It’s goal is to  make a determination of whether undue hardship exists. The totality of circumstances test is less rigid than the Brunner test.  Under the former, specific requirements don’t necessarily need to be present in all instances. No matter which test is used, courts will always perform a case-by-case analysis.  The specifics of an individual’s situation are considered before making a determination. Whichever test is applied, know that courts are not inclined to grant discharges of student loans due to undue hardship .  That’s because of the peculiar nature and history of this type of debt.  As a practical matter, debtors shouldn’t expect to meet the undue hardship requirements except under the most extreme circumstances. 

Contact Us Today to Learn More

As we initially stated, the conditions under which student loan debt may be discharged are exceedingly narrow. This isn’t surprising given that the bankruptcy laws were specifically amended in 1978 to curtail the discharge of such debt. Nonetheless, receiving an undue hardship discharge remains theoretically possible. If you’re curious about the likelihood of discharging your student debt, you need to consult with an experience lawyer. The tax lawyers at Mackay, Caswell & Callahan, P.C., are also well-versed in bankruptcy proceedings.  We are happy to consult with you regarding your student loan debt discharge. If you need this type of assistance, reach out to one of our top New York attorneys today.  With offices in Albany, New York City, Rochester and Syracuse, we’re sure to have someone local to answer your questions today. 

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