Discharging Student Loans in Bankruptcy: A Field Guide For People Who Have Nothing To Lose
Student loans cannot be discharged in bankruptcy. How often have you heard that said? But that bromide is not true. Student loans are being discharged–or at least partly discharged–in the bankruptcy courts every year.
So if you are a distressed student borrower who will never pay back your student loans, why not attempt to discharge your college loans through bankruptcy? What have you got to lose?
You say you don’t have money to pay a lawyer to represent you in bankruptcy court? Then represent yourself. Again–what have you got to lose?
This essay is a field guide for struggling debtors who are thinking about filing for bankruptcy to discharge their student loans. This is a difficult process, and not everyone will be successful. In fact, much depends upon drawing a sympathetic bankruptcy judge. But you will not know whether your college debt is dischargeable through bankruptcy unless you make the effort. So let’s get started.
I. The standard for discharging student loans in bankruptcy–the “undue hardship” rule.
Section 523(a)(8) of the Bankruptcy Code states that a student loan cannot be discharged in bankruptcy unless the debtor can show that paying the loan would pose an “undue hardship” on the debtor and his or her dependents.
Congress did not define undue hardship when it adopted this provision, so it has been left to the courts to define it. Most federal circuits have adopted the Brunner test, named for a 1987 federal court decision. The Brunner test contains three parts:
(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.
Although most bankruptcy courts and federal appellate courts utilize the Brunner test when deciding student-loan bankruptcy cases, there is a remarkable variations among the courts about how the Brunner test is interpreted, with some courts interpreting it more favorably for debtors than others.
II. Filing an adversary complaint
Filing for bankruptcy is a relatively straightforward process–particularly for people who have no assets. Many lawyers will walk you through a Chapter 7 bankruptcy for a flat fee.
But discharging your federal student loans requires you to file an adversary action–a separate lawsuit–against your student loan creditors, which may be the U.S. Department of Education, a student loan guaranty agency, or one of the government’s approved debt collectors. And if you have private student loans you will need to sue your private creditor as well.
Drafting a complaint for your adversary action is not difficult; you can find forms on the web or in published bankruptcy guides.
III. Gather your evidence before you filed your adversary complaint
In my view, you should gather all your documentary evidence before you file your adversary complaint. That evidence should include:
- all the records you have of payments you made,
- correspondence with your creditor,
- documents supporting efforts you made to find employment,
- evidence of health problems, disability status, and any other documents that support your claim that paying off your student loans would be an undue hardship.
In addition, if you negotiated with your creditor about entering into a long-term income-based repayment plan, gather the documents that show what efforts you made to explore repayment options.
If relevant, you should also gather evidence showing the job market for your profession is bad. People who attended law school, for example, should provide evidence of the bad job market for newly graduated lawyers. If you failed the bar exam or another pertinent licensing exam, you should gather evidence establishing that fact.
If you attended a for-profit school that has been found guilty of fraud or misrepresentation, you should obtain documents to educate the bankruptcy judge about your school’s misbehavior.
Why is it important to gather your evidence before you file your adversary complaint? Two reasons:
First, one of the first things your creditor will do after you file your lawsuit is send you discovery requests: 1) interrogatories (questions) about your financial status and your expenses, 2) requests for production of your documents, and 3) requests for admissions (more about requests for admissions later.)
Having your documents prepared in advance will enable you to respond to your creditor’s requests for documents in a timely manner and will subtly communicate that you are prepared to have your case go to trial.
Secondly, assembling your documents early will help you determine the strengths and weaknesses of your case before you file your adversary complaint. For example, if you are disabled or have medical problems, evidence about your health status will be helpful in establishing undue hardship.
On the other hand, if you made few or no payments on your student loans over the years, that is a negative fact for you because the creditor will argue that you did not manage your loans in good faith. Courts have discharged student loans in several cases in which the student debtor made no voluntary loan payments, but you will want to be able to argue you that you meet the good faith test in spite of your spotty payment history.
IV. Know the case law about student loans and bankruptcy in your jurisdiction.
It is also important that you know how courts have ruled in student-loan cases in your jurisdiction. If you live within the boundaries of the Ninth Circuit, you will want to be familiar with the Roth decision, Hedlund, Scott and Nyes. If you live in the Tenth Circuit, you will want to know about the Polleys decision. If you are in the Seventh Circuit, the Krieger decision is important to you.
V. Be psychologically prepared for a long court battle.
Published court decisions show that the Department of Education and the student loan guaranty agencies are sometimes willing to fight student debtors in the courts for a long time. In the Hedlund case, for example, involving a law graduate who failed to pass the bar exam, the creditor fought Mr. Hedlund in the federal courts for ten years.
Why do the student-loan creditors drag out litigation with bankrupt student borrowers? Two reasons: First, the student loan guaranty agencies are reimbursed by the federal government for their attorneys fees, so they have little incentive to stop litigating. And of course, the Department of Education has free government attorneys to represent its interests.
Secondly, by filing appeals and driving up litigation costs, the Department of Education and the student loan guaranty agencies know they are demoralizing student debtors, making it more likely they will abandon their lawsuits. And of course, by imposing heavy financial and psychological costs on people who file adversary actions, the Department of Education knows that it is discouraging distressed debtors from even trying to discharge their student loans in bankruptcy.
VI. Be appropriately suspicious of any document a creditor’s attorney asks you to sign.
Once you file your lawsuit, be aware of two potential dangers. First, the Department of Education or one its debt collectors will probably send you a “Request for Admissions.” Do not ignore that document. If you fail to respond to a Request for Admissions, the statement you are asked to admit is deemed admitted. It is very important to remember that.
Second, it is improper for a party to ask an opposing party to admit a principle of law. For example, it would be improper for a Request for Admission to ask you to admit that it would not be an undue hardship for you to repay your student loans.
Obviously, you should answer all interrogatories and requests for admissions truthfully, but do not admit to propositions that you are unclear about or which you do not understand. If you do not know the answer to a question, it is permissible to state that you do not know.
Similarly, don’t sign a stipulations of facts that a creditors’ attorneys asks you to sign unless you are very clear that signing a stipulation won’t prejudice your case in court. And remember–when a government attorney waves a stipulation in your face and asks you to sign it, the attorney is not making that request to help you. The lawyer drafted that stipulation to help the government.
VII. What do you do if you win your adversary action and the creditor appeals?
In several instances, student-loan debtors have gone to court without an attorney and won their case. It has been my observation that some bankruptcy judges are sympathetic to people who are overwhelmed by student loan debt, and these judges have written remarkably thorough decisions ruling in the debtor’s favor.
But sometimes the creditor appeals, forcing the debtor to figure out how to file a strong appellate brief. For example, Alexandra Acosta-Conniff won a student-loan discharge in an Alabama bankruptcy court, and George and Melanie Johnson won their case before a Kansas bankruptcy judge. In both cases, the debtors were opposed by Educational Credit Management Corporation (ECMC); and in both cases, ECMC appealed.
In my view, debtors need an attorney to represent them in appellate proceedings, so debtors who win their cases at the bankruptcy-court level without lawyers need to find an appellate lawyer to help them if their bankruptcy court victory is appealed.
If it is absolutely impossible to hire an appellate attorney and you are forced to file an appellate brief without an attorney, then you should at least try to find appellate briefs filed in other cases to help you file your own appellate brief. You can contact me, and I will be happy to help you find pleadings that will be helpful to you.
VIII. A few words about private student loans
Thanks to the deceptively named “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” private student loans are as difficult to discharge in bankruptcy as federal student loans. For both types of loans, the “undue hardship” rule applies.
To protect their own interests, the banks and other private student-loan defenders (Sallie Mae, etc.) usually require student borrowers to find a co-signer to guarantee the loan. Generally, the co-signer is a parent or other relative.
So remember, even if you discharge a private student loan in bankruptcy, your co-signer is still liable to pay back the loan. And the co-signer, like you, must meet the “undue hardship” test if he or she tries to cancel the debt in bankruptcy.
The student loan crisis grows worse with each passing month. As the New York Times noted recently, 1.1 million student borrowers defaulted on their student loans in 2016–that is an average of 3,000 defaults a day!
Bankruptcy judges read the newspapers, and many of them have children or relatives who are overwhelmed by their student loans. I think the judges are beginning to be more sympathetic to “honest but unfortunate” student-loan debtors who acted in good faith and simply cannot pay back their student loans.
Some student borrowers have a better case for a bankruptcy discharge than others, but hundreds of thousands of people have a decent shot at getting their student loans cancelled through bankruptcy if they just make the effort.
Filing an adversary complaint in a bankruptcy court takes courage, fortitude and hard work–particularly in gathering evidence necessary to show a bankruptcy judge that repaying your student loans truly constitutes an undue hardship. And not everyone who seeks relief from student loans through bankruptcy will be successful
Nevertheless, if you are a student debtor with crushing student loans, you should consider filing for bankruptcy. If, after careful thought, you determine that you have nothing to lose by filing, then you should file an adversary complaint and fight for relief from oppressive student debt. Others have been successful, and you too might be victorious in a federal bankruptcy court.