Bankruptcy and Student Loans: The “Undue Hardship” Factor

       As tuition rates climb to an all time high, it is not unusual to hear of students leaving college with 40, 50, or even 60 thousand dollars of debt. Many law and medical students are graduating from school with a degree in one hand and 100 thousand dollars in student loans in the other. This continuing increase in tuition has many eager students pursuing community colleges over four year universities. [1] For example, Mott Community College's Michael Kelly states that enrollement has been up 28 percent in the last five years. [2] Kelly says that for some the choice is simple and "[t]he higher the cost is, the more students we get." [3]

      The increase in tuition has lead many students to even pursue different career routes. Take for example Mayrose Wegmann, a 2004 alumnus from the University of Iowa graduating with a degree in political science and journalism, who "should have been starting on her dream career as a political consultant by now." [4] Instead, Wegmann has decided to work for a non-profit organization because the pay is "significantly more than entry-level politics work." [5] Wegmann, focused on paying back her student loan, expressed that "[t]he school debt makes you decide [about your career] based on the money factor. Not based on what you want to do." [6] Mayrose Wegmann is just one of many placed in this predicament, and this real life dilemma has become a common concern among pre-college teens.

      Student loans will have many college scholars paying monthly installments of over 200 dollars for the next 30 years. As if that wasn’t enough to scare pre-college teens from attending college, SallieMae, a leading provider of student loans, states that "[i]f you're having serious trouble paying back your debt, bankruptcy is not an easy out. In fact, bankruptcy should be considered an absolute last resort. And, after all your effort, student loans are not normally included in a bankruptcy filing." [7] Congress enacted Section 523 of the Bankruptcy Code as somewhat of a "high hurdle for debtors seeking to discharge student loan obligations" to prevent a debtor from receiving all the benefits of a financed education and than being able to discharge the education loan in a bankruptcy. [8] Under Section 523, a debtor is only allowed the discharge of student loans when a failure to discharge this debt would impose undue hardship on the debtor. [9] 11 U.S.C.A. § 523(a)(8) states:

       (a) A discharge under [the Bankruptcy Code] does not discharge an individual debtor from any debt-

      (8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents;

The debtor has the burden of proving, by a preponderance of the evidence, that repayment of the educational loan will impose undue hardship. [10] To establish "undue hardship" the majority of the courts have adopted a three-prong test which was established in Brunner v. N.Y. State Higher Educ. Servs. Corp, 831 F.2d 395 (2d Cir. 1987). [11] Under the Brunner test, a debtor must prove that: "(1) 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) 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) debtor has made good faith efforts to repay the loans." [12] All three elements must be satisfied in order for the bankruptcy court to grant that the debt be discharged. [13]

      If a debtor is considering bankruptcy, the existence of prong one may be self evident. Nonetheless, in order to satisfy the first prong, the debtor must illustrate to the court that he or she " could not maintain, based on current income and expenses, a "minimal" standard of living if forced to pay the loans." [14]

      The second prong of the Brunner test considers the debtor’s ability to fulfill his or her financial commitments. The potential future earnings of a debtor are an important factor when determining whether a student loan should be discharged. As illustrated in prong two, this test requires evidence that the debtor not only in his current situation is unable to pay back the loan due to undue hardship, but additionally that there is a strong suggestion that the debtor will be unable to pay back the loan in the future. The rationale behind this element can be illustrated by a recent college graduate. Normally, a recent college graduate’s salary will be low; thus, he or she might have difficulty in initially paying back the loan. However, overtime time, the recent college graduate’s salary should increase; as a result, the undue hardship may not exist. Accordingly, a debtor must demonstrate that the undue hardship is not only a current state of affairs; it is also a condition that will persist. "The debtor must precisely identify his or her problems and explain how that condition would impair his or her ability to work in the future." [15] Consequently, temporarily unemployment, temporarily injuries, etc., may place an individual in undue hardship for a period of time; however, the courts place much emphasis on the longevity of the hardship.

      The last prong of the Brunner test focuses on the good-faith effort of the debtor to try to pay back the loan. The third element is considered to be an underlying policy test, "which considered the amount of student loan debt, the percentage of indebtedness, and the benefit from education."[16] Bankruptcy Courts use this prong to determine, as illustrated in the Sixth Circuit in In Re Tirch, whether the loan should be partially or wholly discharge as not to frustrate the congressional policy underlying 11 U.S.C.A. § 528(a)(8). [17] To fulfill this requirement, the debtor must show that he or she made a good-faith effort to pay the loan back not only in the past, but as well as tried to position himself or herself to pay back the loan in the future, such as by applying to jobs, minimizing other spending, etc.

      The Bankruptcy Code does permit the discharge, or partial discharge, of student loans only when the debt would "impose an undue hardship on the debtor." [18] In most cases where a debtor succeeds, he or she has illustrated that the circumstances are out of his or her control; rather that this burden is not a borne free choice. "These circumstances may include, but are not limited to illness, disability, lack of job skills." [19] Nonetheless, the few individuals that are actually successful in discharging their student loans in a bankruptcy are not completely out of the woods. A bankruptcy filing may stay on one’s credit report for up to ten years and can affect the ability for the debtor to receive future loans. [20]

      Many young adults are now facing the burdens of student debt; some are changing career paths, delaying marriages, and even foregoing having children. [21] The undue hardship factor is an extremely difficult element to prove and is, for the most part, only satisfied when a debtor is unable to work and any employment in the future is non-existent. [22] Bankruptcy does not come without consequences and is not the ideal path for a debtor to take to extinguish his or her student loan debts. Before a debtor looks to bankruptcy, he or she should contact their lenders to see if there are other options.

[1] Kfoxtv.com, College Tuition On The Rise, http://www.kfoxtv.com/news/3834709/detail.html (last visited Oct. 31, 2007).

[2] Bisi Onile-Ere, College tuition costs on the rise, http://abclocal.go.com/wjrt/story?section=local&id=5478864 (last visited Nov. 1, 2007).

[3] Id.

[4] Christian Zappone, Loans – A Life Sentence, CNNMoney.com, (May 2, 2006) available at http://money.cnn.com/2006/05/01/pf/college/reverse_dowry/index.htm?cnn=yes. (hereinafter Zappone, Loans – A Life Sentence)

[5] Id.

[6] Id.

[7] Salliemae.com, Bankruptcy and Student Loans, http://www.salliemae.com/after_graduation/manage_your_loans/borrower_responsibility/managing_debt/bankruptcy.htm (last visited Nov. 2, 2007).

[8] 8b C.J.S. Bankruptcy § 1078 (2007).

[9] In Re Alderte, 412 F.3d 1200, 1204 (10th Cir. 2005).

[10] Id. at 1204 (citing 11 U.S.C. § 523(a)(8)) (emphasis added).

[11] No. 8 Bankruptcy Service Current Awareness Alert 6 (2007).

[12] In Re Alderte, 412 F.3d at 1205

[13] 3 Norton Bank. L. & Prac. 2d § 47:52

[14] No. 8 Bankruptcy Service Current Awareness Alert 6 (2007).

[15] In Re Tirch, 409 F.3d 677, 681(6th Cir. 2005).

[16] 8b C.J.S. Bankruptcy § 1078.

[17] 9D Am. Jur. Bankruptcy § 3672 (2007).

[18] Id.

[19] 11 U.S.C.A. § 523(a)(8)

[20] No. 8 Bankruptcy Service Current Awareness Alert 6 (2007).

[21] Zappone, Loans – A Life Sentence, supra note 5.

[22] Lawyers.com, Student Loans in Bankruptcy, http://bankruptcy.lawyers.com/Student-Loans-In-Bankruptcy.html, (last visited Nov. 5, 2007).

Comments

[Debt Loans]

Is it a good time to be doing this with the state of the economy?

[John Noble]

Is it a good time to be doing this with the state of the economy?

[filing bankruptcy]

With one kid in college and another three years behind, this is a topic near and dear to me and probably thousands of other parents.

[Grant]

Getting student loans is easy, but it should be easy. We need to have higher education available for everyone to make our country better. Sure, its not good when someone takes a loan on that he or she can't pay back, but that is the individuals fault, not the systems.

[Bob]

You need to include that some are leaving the country. That is probably what I will do in 2-3 years. I am beginning t prepare myself for the inevitable. I filed chapter 7 already. Unless they allow me to go back and amend the BK to include my federally backed loans to Sallie Mae I'll have no choice.

Obama has this plan to work it off. I guess that is fine for some, but I do not see why we need to become indentured servants to the government. Are we asked to work off the debt on credit cards?

Obama has proven with these bailouts that there is plenty of money for the banks, now it is time to reward those who went to school and played by the rules. Many of us had no choice but to take loans. I went to a very good school. There was no time to have a second job. Professors do not care that you have to work...they just bombard the student with work because of "academic rigor." Well, guess what..a.s good as the school is and as hard as I worked I could not find a suitable jjob. And I think it is draconian to expect someone who invest years of their life studying to be one thing to tell that person they should be a car salesman just to pay student loans. I earned PhD to be a professor, not a car salesman or insurance salesman.

[Rachael]

Thanks for the information...I bookmarked your site, and I appreciate your time and effort to make your blog a success!

[Student Loans]

Living in the moment is exactly right. College students have been handed money their entire lives and when they graduate and have to start paying them back, reality sets in HARD. Colleges must provide a class for credit that teaches these kids this reality because the college student is done listening to their parents.

If you're smart, you start at a community college where costs can be much lower. Wish our nephew would have done that instead of being saddled with over 70K in debt and he's not even close to the medical field. We had to get loans this year for 2 members of our family. Just the masters degree was over 17K and all of it for tuition. Colleges and lender must unite or we'll see another bailout really soon.

Bob
College Students Surprise: www.Student-Loans-Secrets.Com

[Igqltpgx]

Good crew it's cool :) sextv1 87507

[Financial Advice Articles]

It is really terrible that young people have to start their life with so much debt and loans. They should know more about finances to not let themselves be led into such a disaster

[Rachael]

Thanks for the information...I bookmarked your site, and I appreciate your time and effort to make your blog a success!

[Jimmy@student-loan-solution]

Great post! I didn't have the time to read all messages in this post, but I’ll have to see what I have for you. I’ll be back with a comment or two hopefully…

[Bound for Australia]

The U.S. Constitution prohibits debt peonage, but via NY Bankers and Bill Clinton, we have brought slavery back. This has destroyed my life, prevented having kids, and will never be able to buy a house. If I finnished paying my loans, I would be 72 years old. Good News, if you immigrate to a 1st world country like AUSTRALIA, your old third world debts(U.S. Student Loans), are not recognized or enforceable!
All this for a Diploma that is absolutely worthless, yet is U.S. Department of Education approved.

[Val]

Student loans are impossible. I have been paying on my loan for several years, but since it is consolidated with my ex-husband, the jerk that he is, and he is not paying, my credit is being TRASHED. The laws have stopped spousal consolidations, but they make no provisions for people like me trying to honor their debts but are tied to a**holes who refuse, even under court order.

[Never ending]

Being a recent college grad (May 2007) my student loans take about 40% of my net pay a month. While in school the likes of Sallie Mae allowed me to take out whatever loans I felt like taking out without having any co-signer and no credit. Now I will be paying $500 a month for the next 25 years. There has to be some type of stop to this non-sense. Yea I take repsonsibility for taking the loans out, but there was no one there to stop me and give me a reality check. Most importantly the Financial Aid counselors were no where to be found at the school I went to. They should be there for the students and advise them on these loans, but never once did my advisor at my school help me out. I think it is these private loan providers sending kick backs to the schools and the counselors and turning their backs on what the students really need. Look, college kids are so caught up in the moment of meeting new people, moving away from home for the first time and just getting used to a whole different world they need financial guidance from someone other than their parents and the school should be their to provide that.

[Home Refinance]

Great article. The price of college is up over 400% since 1983, while oil is up a bit over 100% and healthcare is up a bit over 200%. How does that make any sense? The availablity of student loans has run up the cost of education in my opinion. Keep up the good work and I will continue to be educated by your articles.

[Payday Loan Advocate]

Payday loan customers applaud the payday loan industry mainly because, when used properly, they are the fastest and safest way to get out of an unexpected financial fallback. An old saying asks the question, "If something isn’t broken, than why fix it?" This is a perfect question to direct to many politicians who are attempting to or have outlawed the entire industry in many states. Of course, many people who are living beyond financial wealth would agree with this action and bond to fix something that isn’t broken. They have even inspired presidential hopeful, Barack Obama, to join their inexplicable motion. On November 4, vote for the peoples’ right to financial freedom and independence.

[Anagha (cheap loans)]

Hey,

Thanks for providing this great information.

Please keep us updated.

[College Loan Debt Tips]

Privatization and deregulation of some things has not lead to a better deal for Americans. There should be no money to gain from citizens trying to get an education yet there is so much money being made that it is crippling graduates with debt for the rest of their lives before they even start their lives.

[Josh Neumann]

I agree with some of the above posts, getting out student loans is becoming all too easy nowadays, and it is an incredible burden down the road.

Much of this is undue government intervention-if you can't afford it now, don't worry, because you can always get the money you need from uncle sam.

Never mind the problems it will cause you down the road. Unless you have a plan to pay it off, don't bother.

[Stuart Pike]

I have a student loan which I can't pay, I feel like I'm holding a degree from the school of hard knocks.

Sometime I think that bankruptcy is my escape, I am thinking again. I have heard that many government-backed student loans and school loans backed by nonprofit agencies are not discharged in a bankruptcy, which means whatever we owe has to be paid back after the bankruptcy.

Can I rid myself of student loans through a bankruptcy if they represent a substantial hardship --??? Is it true that it is very difficult to prove...?????

[Loans]

Great post, some very interesting points to think about.

[Poorboy Graduate]

I work hard, and now I'm loosing everything. My apr's jumped up to 26% with out my concent, and now I can't afford anything anymore and will have to claim bankruptsy and loose everything. My credit score is ruined for the rest of my life and now I'm stuck in the credit trap of high percentage rates. I never missed a payment until they hiked up my rates. How is this legal? United states government isn't here to help. F|_|ck this country, and if you don't like this message F|_|ck you too. No one helps anyone out anymore, it's dog eat dog here. USA is crumbling while the rich get richer, and good working decent americans like me, get screwed. Thanks lady liberty, you bitch.

[1Clickbankruptcy]

No suprise the big 5 banks are now pushing student loans through TV media like never before. This is due to the new bankruptcy laws back firing on the banks. Student loans are almost never dismissed in bankruptcy therefore the banks are limiting their liability.

[Business Loans]

This is certainly useful for all students looking for a loan... Thank you.

[Free Credit Counseling]

I think the government should implement the same sort of measure they have in England where it concerns student loans and education.