Many people are turning to bankruptcy to get relief from the heavy burden of their debts, especially those people feeling the strain of reduced income or job loss during the COVID-19 pandemic. Those who are hardest hit may be struggling to repay new pandemic-related debts on top of lingering student loan debt, and may seek bankruptcy as a way of dealing with all their debts together. But bankruptcy can’t usually get rid of student loan debt—a little-known fact that often comes as a big surprise to people sitting down with a bankruptcy attorney for the first time.
Individuals considering bankruptcy have several different options to obtain a fresh start, such as dumping their unsecured debt through a Chapter 7, or dumping some debt and paying other debt in order to keep their house and car through a Chapter 13 or even a Chapter 11. But none of these three options allows you to discharge those pesky student loans unless you can show a serious hardship. The Biden administration is currently considering legislation that might mean good news for people with student loan debts, but until new laws are enacted, those darn student loan debts are going to keep hanging around until they’re paid.
Different parts of the country have different laws concerning student loan debts, all depending on which circuit court’s jurisdiction they fall into. In Mississippi, that’s the Fifth Circuit. In Arkansas, the Eighth Circuit. I’ll discuss the requirements for these two courts later in this blog, but first I want to talk about Tennessee. Here in Tennessee, we’re in the Sixth Circuit (also includes Kentucky, Michigan and Ohio), which means that in Tennessee, federal courts—including the U.S. Bankruptcy Court—have to follow Sixth Circuit law, no matter what laws say in other parts of the country.
In the Sixth Circuit, in order to discharge student loans, you have to show that you have a serious hardship, a hardship so devastating that it has rendered you unable to work for the foreseeable future. How is the severity of this hardship determined? The courts use the Brunner test.
The Brunner test (Brunner v. New York State Higher Education Services through Oyler v. ECMC) was adopted by the Sixth Circuit Court of Appeals in 2005. The Brunner test consists of three requirements, and all three requirements must be met to prove that you have a hardship eligible for student loan discharge. To get a hardship discharge, you must show that:
- You cannot maintain a minimal standard of living for yourself and your dependents if forced to repay the student loan.
- Additional circumstances prove that the current state of affairs is likely to persist for a significant portion of the student loan repayment period.
- You have made a good faith effort to repay the student loan.
It is admittedly very difficult to meet all three of these requirements in a bankruptcy case, but it can happen. For example, debtors who are physically or mentally disabled and cannot work at all very often have their hardships approved and their student loan debt discharged.
Mississippi, served by the Fifth Circuit (also Texas and Louisiana), also uses the Brunner test for hardships. In Mississippi, it is difficult to discharge a student loan unless you had a permanent disability that prevents you from working.
Arkansas is in the Eighth Circuit (also Missouri, Minnesota, Iowa, North Dakota, South Dakota, and Nebraska), which has a different standard for student loans. The Eighth Circuit uses a test called the “totality of the circumstances” (adopted in Reynolds v. Pa. Higher Educ. Assistance Agency [In re Reynolds]). This is a less restrictive test in which the court reviews the debtor’s ability to pay the student loan. Let me fill you in on the backstory.
The debtor in the case this test sprang from, Laura Susan Reynolds, suffered from severe mental illness. She filed bankruptcy even though she could afford to pay back her student loan debt over time, and argued in court that the student loan debt was a dangerous threat to her mental health recovery. The court agreed with Reynolds, understanding that Reynolds’ mental illness constituted a hardship serious enough to merit a student loan discharge, even though Reynolds would not have qualified for one under the Brunner test. As a result of this case, the Eighth Circuit chose to take a less-restrictive approach to what qualifies as a hardship in the context of student loan repayment, choosing instead to consider the “totality of the circumstances.”
If you are in the Sixth Circuit (Tennessee) or Fifth Circuit (Mississippi) and therefore cannot discharge your student loans without a serious hardship, then you may not want to file bankruptcy. There are often other, better options than bankruptcy to deal with your student loans.
If you have federal student loans, you can often work with the Department of Education to complete a program called an “income-contingent repayment plan.” Through this program, the Department of Education gathers your financial information and gives you a monthly amount to repay that is doable for you—and this monthly amount can sometimes be zero dollars. At the end of twenty-five years of making payments on the income-contingent repayment plan (even if your payments are zero dollars), your remaining student loan debt will be forgiven. However, this forgiven debt will be reported to the IRS as income, so you may end up paying taxes on it.
It’s very difficult to get your student loan debt forgiven through bankruptcy, but not impossible. But even if you don’t qualify for student loan forgiveness through bankruptcy, there are other ways to confront this special kind of debt that will help you regain control and take steps to eliminate it once and for all. As always, if you are unsure if bankruptcy is the right choice for your circumstances, talk with a bankruptcy attorney! They can guide you to the choice that’s right for you.