With Public Service Loan Forgiveness on the brink of elimination and federal student loan repayment programs expected to be restructured, student loan borrowers have plenty of new information to digest.
One facet of higher education finance has not changed, however: the inability to discharge your student loans in bankruptcy.
I interviewed Josh Cohen, a Vermont-based bankruptcy attorney who specializes in student loans, to share his perspectives.
Zack Friedman: Can your student loans be discharged in bankruptcy?
Josh Cohen: Yes, but only if certain conditions are met. Normally, however, they are not dischargeable.
Zack Friedman: Let’s speak more about those conditions. In most jurisdictions, a borrower has to establish “undue hardship” under the Brunner test.
Josh Cohen: Yes, the Brunner test is the legal test in all circuit [courts], except the 8th circuit and 1st circuit. The 8th circuit uses a totality of circumstances, which is similar to Brunner, but a bit easier to deal with. The 1st circuit has yet to declare a standard.
In plain English, the Brunner standard says:
- the borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the loan; and
- the borrower has made good faith attempts to repay the loan. (The borrower does not actually have to make payments, but merely attempt to make payments – such as try to find a workable payment plan.)
Of course there’s a bit of variance across federal districts, but that’s the basic framework.
Zack Friedman: What is the process to discharge student loans in bankruptcy?
Josh Cohen: In order to have a student loan discharged through bankruptcy, an Adversary Proceeding must be filed (a lawsuit within bankruptcy court), where a debtor claims that paying the student loan would create an undue hardship for the debtor.
Zack Friedman: Do bankruptcy courts treat federal student loans different than private student loans?
Josh Cohen: Private loans, unlike a mortgage or car debt, cannot be cancelled as easily in bankruptcy. Worse, many private lenders require a co-signer. That means two people are in trouble if the loan is not paid. The number of parents who are caught in this nightmare, trying to retire with this over their head, is astounding.
Zack Friedman: What’s the underlying reason why student loans cannot be discharged in bankruptcy?
Josh Cohen: There is a story about doctors crossing the stage as they graduate medical school with a diploma in one hand and a bankruptcy filing in the other.
It is the fear that people would go to school and immediately file bankruptcy.
There is no data to support this. The average consumer does not want to file bankruptcy.