Student Loans

Dischargeability of student loans in bankruptcy has been continuously evolving. Prior to 1998, student loans were dischargeable in bankruptcy if the loans had been due for at least 7 years. Then, in 2008, the law was rewritten to make only private student loans dischargeable. Government-backed student loans were nondischargeable. Then, in 2005, the bankruptcy law on student loans was rewritten to make all educational loans nondischargeable unless you meet the definition of undue hardship under the Brunner test. Currently, in 2021, there is legislation in congress which proposes to make student loans dischargeable again if they have been due for at least 10 years.

Can I File Bankruptcy on Student Loans in San Diego?

If you are asking the question, can I file bankruptcy on student loans, currently the answer is most likely no. With the revisions to the Federal bankruptcy law in 2005, and the Brunner Test, which is controlling law in San Diego County as well as throughout the State of California, there is a very tough standard that you would need to meet in order to be able to wipe out student loans in bankruptcy. Under the Brunner Test, you need to show that you are so physically or mentally disabled that you cannot engage in substantial gainful employment. For this reason, it is rare case in which a borrower is able to eliminate a student loan in bankruptcy under present law.

1998 Code Amendments

In 1998, the bankruptcy code was amended to make it more difficult to file bankruptcy on student loans. The 1998 law made student loans nondischargeable if the loan was made or guaranteed by the Federal Government unless you could show that nondischargeability would pose an undue hardship upon you and your dependents. Student loans still remained dischargeable if the loans were private, i.e., not made or guaranteed by the Federal Government.

2005 Code Amendments

On October 17, 2005, the 2005 Bankruptcy Code Amendments went into effect drastically limiting your ability to discharge student loans for most people. The new law treated privately funded student loans in the same manner as government backed loans such that you cannot eliminate them in most cases. The only exception is that if you can meet the standard set forth by the Brunner Test.

Under the 2005 code amendments, all educational loans, whether government-backed student loans or privately funded loans, are nondischargeable in either a Chapter 7 case or Chapter 13 case unless you can show that nondischargeability would post an undue hardship” upon you and your dependents.

Undue Hardship – The Brunner Test

The Bankruptcy Code does not define what constitutes an “undue hardship.”  To determine whether or not an undue hardship exists, sufficient to allow you to obtain a Hardship Discharge of an educational loan in bankruptcy, the Court will apply a specific test, known as the “Brunner Test.”

The Brunner Test is a 3-Part test first established in 1985 by the Second Circuit Court of Appeals. At the time the test was established, it was not controlling in the State of California.  Fifteen years after the decision was made by the Second Circuit Court of Appeals, the Federal Circuit Court having jurisdiction over California, namely the Ninth Circuit Court of Appeals, made the test applicable in California.

On September 11, 1998, the Ninth Circuit Court of Appeals, which is the Federal Circuit Court that has controlling jurisdiction over California Bankruptcy Courts, formally adopted the Brunner Test and made it the applicable test in our state.  Since that time, the Brunner Test has been the controlling test that is applied by California Courts and judges in deciding whether to grant you Hardship Discharge of your educational loans when you file for bankruptcy.

Under the Brunner Test, the Court will apply a 3-Part test to determine whether an undue hardship exists sufficiently for the Court to grant you a Hardship Discharge when you file for bankruptcy:  (1) You must establish that you cannot maintain, based upon your current income and expenses, a minimal standard of living for yourself and your dependents if you are forced to repay your loans; (2) You must show that additional circumstances exist indicating that your current state of affairs is likely to persist for a significant part of the repayment period of your loans; and (3) You must have made good faith efforts to repay your loans.

In practice, it is very difficult to obtain a Hardship Discharge under the Brunner Test.  Once you pass the first part of the test- you establish that you cannot maintain a minimal standard of living if forced to repay your student loans- you must still show the Court that your situation is not going to change for a significant part of your repayment period.

It will not be presumed by the Court that your current state of affairs is not going to change for a significant part of your repayment period.  Rather, you must make an affirmative showing and prove to the Court that you have an insurmountable barrier to financial recovery that is likely to remain with you for a substantial portion of your repayment period.

Technically, under the Brunner Test, your barrier to financial recovery does not necessarily need to be so extreme that it rises to the level of a physical disability, learning disability, mental illness, or other similar extreme circumstance. 

In reality, bankruptcy judges frequently reserve granting a Hardship Discharge to the extreme case- a case where you are physically unable to work and there is virtually no chance that you will recover and obtain gainful employment in the future.  If there is hope for you to engage in gainful employment, most judges would expect you to find a job and pay off your loans.

Even if you have an extreme case, you must further show that you have made good faith efforts to repay your educational loans.  This means, for example, attempting to work out a repayment plan, consolidating your loans under the Federal Direct Loans consolidation program, and other similar good faith efforts to repay your educational loans prior to filing bankruptcy and requesting a Hardship Discharge.

Partial Discharge

Discharging student loans in bankruptcy is not always an all-or-nothing proposition. Bankruptcy Courts are Courts of Equity and judges have equitable powers and may exercise their equitable powers to partially discharge a portion but not all of your student loans based upon your individual circumstances.

To obtain a partial discharge of your student loans you will still need to meet all 3 parts of the Brunner Test with respect to the portion of your educational loans that you are seeking to discharge.  If and only if you meet all 3 parts of the Brunner Test, then the judge may exercise his or her discretion to grant you a partial discharge of your student loan debt.

HEAL Loans

Health Education Assistance Loan (HEAL) Act loans are subject to an even stricter standard (stricter than the Brunner Test) and are harder to discharge than any other type of educational loan debt.  In particular, discharging a HEAL Loan in bankruptcy requires a finding by the Court that, among other findings, it would be “unconscionable” not to discharge a HEAL Loan.  Unconscionability is a very difficult standard to meet.

Adversary Proceeding Required

If you can establish that your case meets the standard for granting a hardship discharge or partial discharge of your student loan debt, you will need to initiate an adversary proceeding in your Chapter 7 or Chapter 13 case and request that the Court make a legal determination that your loans are discharged by your Chapter 7 or Chapter 13 discharge.

Fresh Start Through Bankruptcy Act of 2021

Under the proposed Fresh Start Through Bankruptcy Act of 2021, student loans may again become dischargeable in bankruptcy after a statutory waiting period just as they were prior to 2005. This time, the proposed waiting period is 10 years from the date the loans became due. Prior to 2005 the waiting period was 7 years. If the current proposed bill passes and the becomes law, student loans will again be dischargeable.

In addition, for student loan borrowers whose loans have been due for less than 10 years, the proposed bill would still allow those borrowers to utilize the undue hardship exception that exits under current bankruptcy law.