Does this sound like you? Are you researching how to discharge student loan debt? You’re not the only one. You struggled through the pandemic, and your finances are a mess. You have more credit card debt than you can handle, possibly a payday or other personal loan, and the interest on those unpaid balances is astronomical. Perhaps you are behind in your mortgage or rent as well. As things return to “normal”, you’re afraid that all this debt is going to cave in on you.
But you also have student loan debt. Even though you weren’t required to make payments on that debt during the COVID crisis, you know the day is fast approaching when that protection is going to disappear. You remember that one of President Biden’s campaign promises was to forgive student loan debt, at least to some extent. However, you are aware that he hasn’t taken any action to make that promise a reality. Should you file bankruptcy now, or wait to see what happens with student loan forgiveness? As you are likely aware, at the present time, student loans cannot be discharged in most bankruptcies, which means that although you list them on Schedule F of your bankruptcy papers, they survive the bankruptcy discharge and you are still liable to pay them. The only way you can get out of student loan debt currently is if you can show that repaying them would impose an undue hardship on you and your dependents. (More about the test requirements for a finding of undue hardship later on in this article.)
The amount of unpaid student loan debt nationwide is tremendous, and eventually, the government is going to have to deal with it in some way. When Congress does enact a law to forgive a portion or all of student loan debt, it is very likely that it will accomplish that by making it possible to discharge student loan debt in Chapter 7 and/or Chapter 13 bankruptcy, rather than just sweeping away student debt automatically.
So the decision you have to make is whether you wait until the law on student loan debt (hopefully) changes before you file a bankruptcy, or whether you get some relief from your other creditors by filing bankruptcy now.
If your creditors are closing in on you now, or you want to take precautions against a creditor filing a legal action such as a foreclosure or a lien on your house or repossessing a vehicle, then you should look into filing bankruptcy now. And the door will remain open in the future, when the law changes in regard to student loan debt, for you to come back to that same bankruptcy case to get rid of the existing student loan debt.
Bankruptcy law provides that after a bankruptcy case is fully administered, the trustee is discharged from his/her duties and the court closes the case. However, that same case can be reopened in the future for some purposes. One of the purposes for which it may be reopened is to allow a debtor to file a proceeding to determine the dischargeability of a debt, such as student loans. There is no additional filing fee required for a debtor to reopen a case for this purpose, and it has been routinely used for cases where the debtor later finds himself in a financial situation where he believes he can qualify for a finding of undue hardship. On this basis, there should be no bar to debtors reopening cases when the law changes to provide for dischargeability of student loans — with one possible exception. At least one bankruptcy court, not in Ohio at this point, has ruled that the student loans in question must have existed on the date that the bankruptcy petition was filed, and must not have been consolidated after the petition date. In that judge’s opinion, the consolidation constitutes a “new” student loan, and therefore, if it occurred after the bankruptcy was initially filed, it is a post-petition debt and is not eligible for the undue hardship test. While the Southern District of Ohio has not followed this rule to date, it is likely safer to err on the side of not consolidating student loan debt if you plan to make use of the opportunity to reopen a case.
Over the years, the bankruptcy courts have come up with a test to determine whether you qualify for dischargeability due to undue hardship, and have made it a very high standard to beat. The longstanding requirements to meet the undue hardship test were recently spelled out in a decision by Judge Humphrey in the Bankruptcy Court for the Southern District of Ohio. The courts in this area use the “Brunner test” to determine whether repayment of a student loan would impose an undue hardship on a debtor. Under this 3-pronged test, the debtor must show the court that:
(1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living if he is forced to repay the loans; (2) that additional circumstances exist that indicate that this state of affairs is likely to continue for a significant portion of the repayment period of the student loans; and (3) that the debtor has in the past made good faith efforts to repay the loans.
Judge Humphrey then provided a very thoughtful, thorough explanation of what was required of a debtor trying to prove undue hardship under each prong of the test:
1. Whether the Debtor Can Maintain a Minimal Standard of Living if Forced to Repay the Loan
Judge Humphrey explained that maintaining a “minimal standard of living” does not require that the debtor live in poverty, but does require the debtor to reduce or eliminate some living costs or amenities in order to pay some amount to his student loan creditors. The Judge listed the following categories as understood to constitute a minimal standard of living:
- People need shelter, which includes furnishings, maintenance, cleaning, and pest control. It also needs to be heated and cooled.
- People need basic utilities such as electricity, water, and natural gas, as well as telephones and internet service to communicate.
- People need food and personal hygiene products. They need clothing, and the ability to clean those items and replace them when they are worn.
- People need vehicles to go to work, to stores, and to doctors. They must have insurance and the ability to buy license plates for those vehicles, as well as gas, routine maintenance, and to pay for unexpected repairs.
- People must have health insurance or the ability to pay for medical and dental expenses. They also must have at least small amounts of life insurance.
- People must have the ability to pay for some modest source of recreation.
Therefore, the Court is not requiring that debtors live at the poverty level to qualify to discharge student loan debt, but only that they shave off excess expenses that rise above the minimum standard of living to provide some funds that can be paid to the student loan creditors.
2. Whether Additional, Persistent Circumstances Beyond the Debtor’s Reasonable Control Are Present
These additional circumstances must be beyond the debtor’s control and be reasonably expected to persist for a significant portion of the loan repayment period. They must indicate a “certainty of hopelessness [as to repayment of the debt], not merely a present inability to fulfill a financial commitment.” In applying this prong of the Brunner test, the Court looks at additional circumstances such as the years remaining in the debtor’s work life to allow repayment of the loan, the debtor’s age, health, or other pertinent factors.
3. Whether the Debtor Demonstrated Good Faith Efforts to Repay the Loans
In this prong of the test, the Court looks at any efforts the debtor has made in the past to honor his student loan debt commitment. Judge Humphrey looked at the factors he and most other courts use as a guide to determine whether the debtor has made an honest effort to repay the student loans prior to filing the bankruptcy:
- Whether the debtor’s failure to repay his student loan obligation was truly because of factors beyond his reasonable control;
- Whether the debtor realistically used all available resources to repay the debt;
- Whether the debtor is using his best efforts to maximize his earning potential;
- How long after the loan first became due did it take the debtor to seek to discharge the debt in bankruptcy;
- The percentage of the outstanding student loan debt in relation to the debtor’s total indebtedness; and
- Whether the debtor obtained any tangible benefit from the student loan obligations.
One of the matters of great importance to a court in reviewing whether the debtor is successful under the third prong of the test is whether the debtor previously investigated or applied for one of the income-driven repayment (IDR) plans offered by the Department of Education, each of which offers debtors single monthly payments based on their income and household size. Such an effort by the debtor indicates to the Court that the debtor has taken his debts seriously and has done his utmost to repay them despite his unfortunate circumstances. [Judge Humphrey recognized the problem that arises when debtors apply for IDR and consolidate their loans for that purpose, although he didn’t rule on that issue. Again, the safest way to protect yourself is to consolidate the loans before filing the bankruptcy case.]
If you think you can qualify for an undue hardship under the Brunner test, you should seriously consider meeting with a bankruptcy attorney to discuss your circumstances, and go forward with a bankruptcy case that includes taking the extra steps towards getting the student loan debt discharged (and thus get on with your life!). If you don’t qualify to discharge the student loan debt now, discharging the other creditors you have should make it easier for you to make student loan payments now (especially under an IDR plan) and then reopen the bankruptcy when a discharge of that type of debt is allowed by law.
 Hastings v. U.S. Dept. of Ed., U.S.Bankr.Ct. (S.Dist. OH)(Feb. 3, 2022).
 Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).