Bankruptcy laws in the U.S. have been designed to give honest debtors a fresh start. If someone is genuinely struggling with credit card bills, an underwater mortgage, or even gambling debts, that person can file for bankruptcy – in Texas or in any other state – and start over. However, student loans are one of just a few types of debt that do not qualify for bankruptcy, putting them in the same category as unpaid criminal fines and unpaid child support.
This wasn’t always the law. Bankruptcy rights regarding student debts were slowly eroded over a number of years as legislators enacted law after law to reduce students’ access to bankruptcy. In the 1970s, Congress became alarmed about skyrocketing default rates on federal student loans and government-backed private loans. In just three years, from 1973 through 1975, the number of indebted students filing for bankruptcy jumped from under 30 percent to almost 60 percent, so in 1976, the bankruptcy code was amended, and a quick succession of new laws soon permanently blocked anyone from discharging student debt through bankruptcy.
CAN STUDENT LOAN DEBT NOW BE DISCHARGED?
Currently, the only way for student loan debtors to start fresh is by taking advantage of a little-known legal tool that allows the discharge of student debt through bankruptcy if a debtor can prove that repaying a student loan will cause a severe economic hardship. The test used to confirm severe hardship varies slightly from state to state and from court to court, but most bankruptcy courts are still quite reticent about discharging student loans. However, if a person’s income is minuscule, or if a person has no income, it is possible – in the most egregious hardship cases – to discharge a student loan through bankruptcy.
Since 1987, many bankruptcy courts use the Brunner test, which indicates whether a debtor can afford to pay his or her student loan. To meet the Brunner test’s criteria, a bankruptcy petitioner trying to discharge a student loan must prove that he or she has attempted in “good faith” to repay the loan, that if forced to repay the loan, the petitioner will be unable to maintain a “minimal” standard of living, and that the situation is likely to persist indefinitely. In 2015, the Department of Education announced that it will not oppose the discharge of student loans in bankruptcy cases where repaying the loan would impose an undue hardship on the debtor.
ARE COURTS CHANGING THE RULES ABOUT STUDENT LOAN DEBT?
The Brunner test was adopted after the 1987 case of Marie Brunner v. New York State Higher Education Services Corp. Ms. Brunner was out of graduate school for less than a year when she filed for bankruptcy in New York. The court determined there was no reason to believe that she would be unable to find a job in the future, so her bankruptcy application was denied. However, the legal principle established in that case has opened the door for others who need to discharge student debt.
In 2013, two cases dramatically changed the legal landscape for debtors who need to discharge student loans. In Myhre v. Department of Education, the Department of Education insisted that Bradley A. Myhre, an unemployed quadriplegic, should be forced to repay a large student loan. In Roth v. Educational Credit Management Corporation, the creditor claimed that Janet Roth, an unemployed 68-year-old woman living entirely on Social Security checks, was capable of making payments for the next quarter-of-a-century on a debt that had grown from $33,000 to almost $100,000 with interest.
In both 2013 cases, the debtors prevailed. The court ruled that a repayment plan would be “disastrous” for Ms. Roth. In the Myhre case, the judge determined that Mr. Myhre also deserved to have his loans discharged. “You see more and more judges siding with debtors for humane reasons,” according to Richard Fossey, a professor at the University of Louisiana who studies student bankruptcy cases. Fossey believes bankruptcy courts are more compassionate today and are once again leaning toward the original reason for bankruptcy laws – a fresh start for honest debtors.
WHY IS STUDENT LOAN DEBT A GROWING CONCERN?
The exact definition of “undue hardship” will be different in each state, but because the undue hardship standard is so high in Texas, student loan debts are almost never discharged through the bankruptcy process in this state, and those who try will no doubt need the help of an experienced Houston or Dallas bankruptcy attorney. It’s no surprise that student loan debt is a growing concern. Federal and private student loan debt surpassed credit card debt for the first time in 2010 and now exceeds $1 trillion. Students who graduated from college in the United States in 2015 graduated with an average of $35,000 in student loan debt.
Some may fear that letting graduates discharge their student loans creates a situation where students take out big loans for college and then file for bankruptcy almost as soon as they graduate. Those fears are misplaced, however, because so few people will be able to satisfy the criteria of the Brunner test. Bankruptcy is a lengthy, complicated legal process, and safeguards are firmly in place against those who would abuse the system.
WHAT CAN BANKRUPTCY ACCOMPLISH?
In the typical Chapter 7 bankruptcy, assets are liquidated and sold to pay unsecured debts. Medical bills and credit card debt can be discharged, and debtors are protected during the bankruptcy procedure from repossession, foreclosure, and lawsuits filed by creditors. In a Chapter 13 bankruptcy, debtors may retain some of their assets, but a Chapter 13 bankruptcy creates a repayment plan and schedule, and debtors agree to pay their creditors over a specified period of time, usually three to five years. Texas does not require debtors declaring bankruptcy to have legal assistance, but it’s a good idea to consult first with a Houston or Dallas bankruptcy attorney.
Student loan debt is a problem, and not just for the graduates who are $35,000 in debt. It hurts everyone. Not only has student loan debt sucked up a trillion dollars that would otherwise be providing the U.S. economy with a much-needed jolt, but it prevents college graduates from borrowing to start businesses and from putting their educations to work. It’s time to make a college education less costly and to set graduates free from debt so that they can prosper, pay taxes, and begin their careers without being stuck in the deep financial pit that student debt creates.