Many are surprised to find out that student loans are one of the few debts that are not discharged through bankruptcy relief. However, there is now a bill called the Student Borrower Bankruptcy Relief Act of 2019, which has bipartisan support from U.S. Senators Dick Durbin (D-IL) and Elizabeth Warren (D-MA) as well as U.S. Representatives Jerrold Nadler (D-NY) and John Katko (R-NY).
“Filing for bankruptcy should be a last resort, but for those student borrowers who have no realistic path to pay back their crushing student loan debt, it should be available as an option to help them get back on their feet,” Durbin said in a statement. “Our nation faces a student debt crisis, and it’s time to restore the meaningful availability of bankruptcy relief to student loan borrowers.”
Why is this debt not discharged?
The short answer is that this rule was part of 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, which exempted federal and private student loans from discharge. The concern was that those with student loans (the current number in this country is 44 million current and former students) would take out exorbitant amounts of debt and then file bankruptcy once they get a degree. Critics of the 2005 law disagree, pointing out that filing bankruptcy is still a major life decision.
Exception to the rule
What some do not realize is that there are exceptions to the “no bankruptcy” rule. Known as the Brunner Test, this is used in all circuit courts (except the 8th and 1st, neither of which are in Texas) to determine if there is an undue hardship. This is done by considering the following:
- The borrower has extenuating circumstances where paying the loan would mean not being able to maintain a minimum standard of living.
- These circumstances would continue while paying the loan.
- The borrower showed good faith in trying to repay the loan, even if they have not made payments.
The courts can also consider age, health, income and other financial or life circumstances. Currently, student loans are discharged in bankruptcy through an Adversary Proceeding, which is essentially a lawsuit in bankruptcy court.
We will keep an eye on this bill to see if it passes. However, those who have questions about the Brunner Test or filing bankruptcy can discuss the matter further with a bankruptcy attorney. These legal professionals can provide a more thorough analysis based on the details provided by the client.