STUDENT LOANS

If you are having trouble with a student loan, the best thing to do is to first contact your lender and try to rework the loan. You can get some general information on cancelling your student loan on information contained at the Department of Education, Federal Student Loan website: Department of Education.

As a general rule, however, student loans are not dischargeable in a Bankruptcy Proceeding under Bankruptcy Code sec. 523 (a) (8).

The general rule is that Student Loans are not dischargeable, unless you can show “undue hardship.” Following the Amendments to the Bankruptcy Code effective October 17, 2005, Bankruptcy Code sec. 523 (a) provides

“A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt (8)unless exception such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for . . . (B) any other eeducational loan that is a qualified education loan as defined in section 221 (d) (1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual...”.

The meaning of “undue hardship” is not defined in the Bankruptcy Code. There does not appear to be any controlling law in the 9thCircuit. However, other jurisdictions that have addressed the issue such as the 6th Circuit, have adopted the so-called Brunner test for determining whether the repayment of a student loan would impose an undue hardship on a debtor. Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382 (6th Cir. 2005); see Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987).

As summarized by the court, the Brunner test requires a three-part showing by the debtor:

1) that the debtor cannot maintain, based on current income and expenses a “minimal” standard of living for herself and her dependents if forced to repay the loans;
(2) that 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) that the debtor has made good faith efforts to repay the loans.

Fields v. Sallie Mae Serv. Corp. (In re Fields), 326 B.R. 676, 681 (B.A.P. 6th Cir. 2005) (quoting
Miller v. Pa. Higher Educ. Assistance Agency (In re Miller) , 377 F.3d 616, 623 (6th Cir. 2004)).

To obtain a discharge of student loans, a debtor must show by a preponderance of the evidence that
he has satisfied all three prongs of the Brunner test. In re Miller, 377 F.3d at 623.

With an uncertain economy and industries where debtors are becoming unemployable, this is likely to be hot subject of litigation in the Bankruptcy Court, to be determined on a case by case basis.