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Student Loan Debt in Bankruptcy

student loans.jpgAccording to recent reports, the average amount of student loan debt for a 2015 college graduate is $35,000. Not only has that number steadily increased in recent years, a greater percentage of students are taking out student loans to help finance their college education. Given the staggering amounts of student debt and the weak job prospects for graduates coming out of college, it comes as no surprise that we are seeing the highest rate of defaults since 1995. As a result, those borrowers may be facing a crippling amount of student debt and even considering filing bankruptcy.

Are Student Loans Dischargeable in Bankruptcy?

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), which amended the Bankruptcy Code. The purpose of the amendment was to prevent undeserving borrowers from discharging their student loan debt soon after graduation. Under current federal law, it is presumed that student loan debt is non-dischargeable in bankruptcy.

However, there is an exception in the law known as the undue hardship doctrine. This allows debtors to discharge some of their student loan debt provided that they can show that such debt would impose an undue hardship on the debtor and the debtor's dependents. Many courts have established various tests to determine undue hardship as the term is not defined in the Bankruptcy Code.

California courts use what is known as the Brunner Test to determine undue hardship. Under the Brunner Test, the debtor must meet three elements:

  • If the student/borrower is forced to repay the student loan, he/she cannot maintain his or her current standard of living taking into account the debtor's current income and living expenses. Courts also generally evaluate whether the debtor is eligible for repayment plans that are applicable to federal loans, which can significantly lower payments for individuals with low-income. Private loan borrowers do not have as many options for repayment plans;
  • The debtor must show that this state of affairs or situation is likely to exist for a significant portion of the repayment period for the student loans. This element is usually difficult to satisfy given that there is a presumption that the debtor's income will increase over time unless the debtor can prove otherwise; and
  • The debtor has made a good faith effort to repay the loans.

While it has historically been very difficult for debtors to satisfy the Brunner Test, two recent decisions by the Ninth Circuit Bankruptcy Appellate Panel, which includes California, ruled that at least part of the student loan debt could be discharged in those situations. This may signal a shift to a more liberal interpretation of the Brunner test than courts have previously used in California.

If you have student loan debt and are considering filing for bankruptcy, you can contact a skilled San Jose bankruptcy law attorney today to discuss your legal options. You do not have to endure the crushing weight of overwhelming debt. At Diemer, Whitman & Cardosi, LLP, we do our utmost in every case to see that our clients get the meaningful debt relief they need.

Sources:

http://blogs.wsj.com/economics/2015/05/08/congratulations-class-of-2015-youre-the-most-indebted-ever-for-now/

http://www.huffingtonpost.com/2013/09/30/student-loans-default_n_4019806.html

https://www.law.cornell.edu/uscode/text/11/523

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