When you’re struggling with mounting debt balances, bankruptcy can give you the financial relief you need- unless your goal is to eliminate student loan debt. This is not to say that you can’t discharge your student loans, but it’s extremely difficult, and the chance of success has traditionally been low.
For a bankruptcy court to consider a discharge, you need to pass a set of standards known as the Brunner Test. This test originated with a 1987 bankruptcy case, Brunner v. New York State Higher Education Services, Corp.
You would need to prove that:
- You made a good faith effort to repay your loans.
- Paying back the loans would cause unfair and unreasonable financial hardship. This means that based on your current income and expenses, you and your dependents could not maintain a minimal standard of living if loan repayments continue.
- This hardship is unlikely to end before the repayment period ends
The Bankruptcy Code does not define undue hardship, so the court must decide on a case-by-case basis whether you are able to deal with your student loans now or sometime in the future. Historically, those who were most likely to get a discharge were older (usually above the age of 50), unlikely to encounter better financial circumstances, and made a sincere attempt to pay off their loans.
Rosenberg v. N.Y. State Higher Education Services Corp
A recent example of a successful discharge application is Rosenberg v. N.Y. State Higher Education Services Corp. A New York law school graduate filed for Chapter 7 bankruptcy and sought to discharge around $220,000 in student loan debt. The bankruptcy court granted the petition because Mr. Rosenberg was able to prove that:
- Paying the loans would leave him with a negative monthly income of around $1,500
- His financial hardship was likely to continue because the debt was in default and the entire balance was due in full
- He had made good-faith efforts to repay, including ten payments during a period when the loan was neither in forbearance nor deferred
While the New York State Higher Education Services Corp can still appeal this ruling, it shows that meeting the standards of the Brunner test are not impossible- just extremely difficult.
Even if you don’t pass the Brunner Test or any other criteria imposed by your local bankruptcy court, filing for bankruptcy can still improve your situation if you also have huge amounts of other debt, like credit cards or medical bills. Chapter 7 can eliminate these obligations, leaving you with more money to put toward your student loan payments.
When you’re considering bankruptcy as a way of dealing with student loans, contact a New York bankruptcy attorney who can advise you on your likelihood of succeeding. Jayson Lutzky is offering consultations via phone and video, and bankruptcy courts are still processing applications during the COVID-19 crisis, so don’t hesitate to reach out. You may reach Mr. Lutzky’s office at 718-329-9500.