On January 7, 2020, the U.S. Bankruptcy Court in the Southern District of New York discharged more than $220,000 in student loans for a single borrower. This decision This decision contradicted what many believe to be true about bankruptcy and student loan debt. In her ruling, Judge Cecelia Morris explained that most people “believe it impossible to discharge student loans,” and the court “will not participate in perpetuating these myths.”
For millions in the U.S., student loan debt has been the unfortunate exception to the freedom obtained through bankruptcy. Unlike other types of debt, student loans must cause “undue hardship” for the borrower in order for a bankruptcy court to discharge them under the first prong of the Brunner test. Specifically, under the Brunner test a borrow must show that: (1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; (2) 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; and (3) the debtor has made good faith efforts to repay the loans.
However, according to research by Villanova University’s law professor, Jason Iuliano, it may not be as unlikely as some would believe. In fact, nearly 40% of those who file on the grounds of undue hardship succeed in discharging some or all of their student loans—and this percentage is rising. The problem, according to Iuliano, is that those with overwhelming student loan debt don’t know about this success rate, so they usually only attempt to discharge credit card debt. Those who try to rid themselves of student loans make up less than 1% of student loan debtors who file for bankruptcy.
What Is Undue Hardship?
As we see in Judge Morris’s decision, every court differs in how it interprets “undue hardship,” especially since Congress hasn’t agreed upon a specific definition. So what does undue hardship typically look like?
Iuliano’s research shows that courts generally discharge student loans when the borrowers experience undue hardship such as:
- Medical hardship
- Low annual income
Bankruptcy can severely impact credit, and it is usually only an option for those facing dire financial circumstances. But many believe student loan debt is the financial crisis of our time. According to research by Forbes writer Zack Friedman, 45 million Americans collectively owe $1.5 trillion in student loan debt, and the average borrower who graduated in 2017 owes nearly $30,000. This means it is 2nd only to mortgage debt, ahead of both credit cards and auto loans. Furthermore, according to recent trends, younger generations (namely millennials) are foregoing the luxury of owning real estate, so researchers believe student loans will soon become the leading category of consumer debt in the U.S.
Hopefully, most bankruptcy courts will make decisions that recognize and address this ever-worsening plight, and more student loan borrowers can then benefit from this much-needed relief.
Many lawyers see their clients as case numbers. Our attorney at The Southard Law Firm, L.L.C., however, is deeply passionate about his work. He values each and every client because he sees them as human beings who dream of better futures. While those filing for bankruptcy have unique histories and circumstances, all those struggling under the weight of debt deserve financial freedom, and we are committed to fighting for the best possible results on our clients’ behalves. To learn more about your options, call (513) 399-8806, or get started on your case today with a free phone consultation.