Bankruptcy and Student Loans: The Hard Truth

I recently sought legal advice about student loans and bankruptcy in an informal setting. I use the term informal because while I did not retain the services of a lawyer for the purpose of filing bankruptcy I did consult with a lawyer on the topic and compensated this lawyer for his nonbinding opinion.

So here is the skinny on that communication.

While it is generally true that one cannot claim one’s student loans under a bankruptcy filing it is possible to do so in special circumstances. This special circumstance is known as undue hardship.

According to this lawyer, for a person to succeed on a claim of undue hardship they must satisfy the test for undue hardship as laid out in the case of Brunner v. NY State Dept. of Education. In this case, the district court adopted a standard for "undue hardship" that required a three-part test. First, the debtor must show that he or she cannot maintain, based on current income and expenses, a "minimal" standard of living for themselves and their dependents if forced to repay the loans. Second, the debtor must show that additional circumstances exist which indicate that the current hardship is likely to persist for a significant portion of the repayment period of the student loans. Third, the debtor must show that they have made good faith efforts to repay the loans. The first part of this test has been applied frequently as the minimum necessary to establish "undue hardship."

Other cases that the lawyer cited as support for the use of this test include Bryant v. Pennsylvania Higher Educ. Assistance Agency (In re Bryant), 72 B.R. 913, 915 (Bankr.E.D.Pa.1987); North Dakota State Bd. of Higher Educ. v. Frech (In re Frech), 62 B.R. 235 (Bankr.D.Minn.1986); Marion v. Pennsylvania Higher Educ. Assistance Agency (In re Marion), 61 B.R. 815 (Bankr.W.D.Pa.1986).

Now, if there are some lawyers out there specializing in bankruptcy and you have experience with these loans please comment here and let us know what you have seen. We would all appreciate it.

In addition, if you are a borrower that sought to have your loans dismissed with the undue hardship test please let us know about your experience. Any and all other related comments are also welcome.

My next blog entry will be on Monday, September 21st, 2009. However, I will be still checking in on the blog over the weekend for your comments so please feel free to jump in.

May you all have a great weekend!