Chapter 7 Student Loans

Many people assume that student loans can never be discharged in Chapter 7 bankruptcy. While it is difficult to achieve this goal, it may not be impossible.

Introduction

In 1976, Congress made it exceedingly difficult to discharge student loans. This was in response to media attention concerning individuals who successfully filed bankruptcy to discharge student loan debt. The media highlighted that some of these litigants purchased expensive cars and homes. As such, and in response to the abuse, the legislative enacted changes to the bankruptcy codes.

1. The Brunner Test

In 1987 the 2^nd Circuit Court of Appeals in Brunner v. New York Higher Education Services Corporation (831 F.2d 395) reaffirmed the lower Court denial of a student loan discharge. The Court created a three-part test regarding the requirements needed to obtain a legal discharge.  The test, which requires all three parts to be present, states:

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. (831 F2d 395,395).

While the case was never appealed to the Supreme Court, most other Circuit courts have adopted the test. An exception was the 8^th Circuit which opted out of the three-part test and instead base their decisions on the totality of the debtor’s circumstances.

Needless to say, the Brunner rule resulted in very few successful student loans discharges.

• McCoy v. United States.

In 2021, the Supreme Court refused to grant certiorari in the case of McCoy v. United States (141 S.Ct. 2794). The Plaintiff was challenging the undue hardship part of the Brunner test. The 5th Circuit denied her a student loan discharge. By refusing certiorari the Supreme Court was implicitly affirming Brunner.

• United States Department of Justice (DOJ) Guidance

In November 2022, the DOJ issued guidance as to how the government would handle student loans discharges under the Brunner Test. While the guidance was issued during the Biden Administration, it seems to remain in effect even though it is no longer posted on the DOJ’s website.

The Brenner Test created a streamlined process for applying to discharge student loans. In bankruptcy, the debtor is required to file numerous forms to obtain a discharge of debt. However, if you want to discharge student loans, the debtor must also file an adversary complaint against the Department of Education. Under the DOJ Guidance the debtor must complete and file a specific form and, if the DOJ agrees after examining the form, they will not oppose the discharge of student loans. This guidance has enabled many more people to successfully obtain a discharge of student loans.

How RJS Law Can Help

If you are unable to pay your student loans, bankruptcy may be a viable option.

The qualified bankruptcy attorneys at RJS LAW can review and discuss your options.  If deemed appropriate, RJS LAW can file the Bankruptcy Petition and the Adversary Proceeding, prepare the questionnaire for the Department of Justice, and attend all hearings on your behalf.  

For additional information, please reach out to RJS LAW on the internet or by calling 619-595-1655 for a free consultation. 

Written by Andy Epstein, Esq., CPA, LL.M. (Taxation)

Certified by the State Bar of California as both a bankruptcy and taxation specialist.