Bankruptcy Is Not The Way To Get Rid Of Student Loan Debt… Yet

There are roughly 43 million Americans who have some sort of federal student loan debt. It is therefore not surprising that President Biden’s plan to forgive up to $20,000 held by low- to middle-income borrowers is making headlines and inspiring a lot of questions from Hanson & Payne clients. 

For many student loan debtors in Wisconsin, Biden’s plan may be the only sort of forgiveness they can ever expect, no matter how dire their financial situation. Except in very rare circumstances, student loan debt is not dischargeable through bankruptcy… yet. 

Biden’s Student Loan Forgiveness Plan

In August, President Biden announced a plan to forgive up to $20,000 of student loan debt held by low- to middle-income borrowers while restarting loan payments that have been paused since March 2020:

“The Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 ($250,000 for married couples).”

The Department of Education estimates that, among borrowers who are eligible for relief, 21% are 25 years and under and 44% are aged 26-39. More than a third are borrowers age 40 and up, including 5% of borrowers who are senior citizens.

If all borrowers claim the relief they are entitled to, 20 million borrowers will see their full debt wiped out. This is a big deal since filing for bankruptcy typically does not impact one’s student loan balance. 

Can Student Loans Be Forgiven Through Bankruptcy? 

Declaring bankruptcy typically does not help someone whose debt load is mostly student debt. Only in rare circumstances is student loan debt dischargeable through bankruptcy. 

The courts apply what is known as the Brunner test to determine whether a filer’s student debt may be forgiven. In order to be eligible for student loan forgiveness, a debtor must show:

  1. His or her loans and life circumstances are creating a hardship;
  2. Those circumstances are likely to continue for the entire term of the loan; and
  3. He or she has made good faith attempts to repay the loan. 

While these are fairly straightforward criteria, the courts have been reluctant to decide that student loan debt is forgivable. 

However, there is a movement to change this. The national conversation over student loan debt has inspired policymakers to take a closer look at the current system with an eye toward improving it. Making student loans dischargeable through bankruptcy is one option being considered. 

A Milwaukee Area Bankruptcy Attorney You Can Trust 

If you are worried about keeping up with your student loans when payments resume, Hanson & Payne is here for you. Please contact us today to schedule a meeting with our experienced team of bankruptcy attorneys. The debtor cannot maintain, based on their current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay their loans;

Additional circumstances exist indicating that this situation is likely to persist for a significant portion of the repayment period of the student loans, and the debtor has made good faith efforts to repay their student loans. 

In these cases, the courts really focus on the hardship that the loans are creating. Are the student loans making it difficult to pay other bills? Is it impossible to find a decent place to live or move to a new location because of the student loans? What would you be able to do without the loans that you are unable to do now? Specific details are needed to persuade the judge that the hardship the debt is creating is unbearable and that the student loans should be forgiven. This typically covers both the first and second prongs of the Brunner test.

To meet the third prong of the test, one does not need to show that any payments have been made. It is enough to show that the borrower was serious about budgeting, or attempted to enroll in an income-based repayment plan. What the court is looking for is evidence that the borrower would pay the loans back if he or she were able to do so. 

Unlike many other types of debt, student loan debt is not tied to any collateral. Nobody can repossess the lessons you learned while sitting in a lecture hall to pay themselves back if you don’t have the cash to do so. This is one of the main reasons student loan debt is not dischargeable. 

But compare this to other types of debt without collateral that is dischargeable, including credit card debt and gambling debts. These debts without collateral are typically dischargeable. In the eyes of policy-makers, the difference is in the magnitude and scale of the potential debt, and the perceived societal benefits tied to educational debt. 

PLUS loans, like other student loans, are not always dischargeable through bankruptcy. A filer must prove repaying the loans would be an undue hardship. This is a difficult burden to meet, but the difficulty of meeting it should not prevent you from seeking relief and consulting with one of the experienced bankruptcy attorneys at Hanson & Payne.