Student loans and Oklahoma bankruptcy are once again in the news. Student loans are a leading source of personal debt in the United States.  For many people student debt is a large portion, and in some cases, the majority of their debt.  Many potential bankruptcy debtors are unsure whether or not their student loans can be discharged.  Recent statements by the President and by the Department of Education concerning student loans have further confused this situation.  It’s important for potential debtors to have a clear understanding of what the laws are concerning student loans and Oklahoma bankruptcy. By understanding the rules your expectations regarding bankruptcy and student loans will be realistic.

Basic Guidelines For Student Loans:

The basic law surrounding student loans and Oklahoma bankruptcy remains the same since the bankruptcy reforms of 2005.  Generally, 11 USC §523(a)(8) states that any education loan guaranteed by the federal government cannot be discharged unless not doing so would create extreme and undue hardship for the debtor.  After 2005, that law also applies to any student loan made by a private entity.  Thus, any and all student loans, federal or private, are subject to a “undue hardship” test in bankruptcy.

Undue Hardship Explained:

The statute does not define “undue hardship,” and the Supreme Court has yet to issue a ruling on the issue.  Thus, Federal Circuit courts determine the standards measuring undue hardship.  The most commonly used test comes from a New York case from 1987, Brunner v. New York State Higher Education Services Corp., (831 F.2d 395, 2d Cir. 1987).  In Brunner, the Second Circuit determined that an undue hardship consists of three factors:

1. Inability to maintain a minimal standard of living if forced to repay the loan.
2. Additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and
3. Debtor has made good faith efforts to repay.

This test is, in and of itself, vague, particularly “additional circumstances” and “good faith efforts.”  Since the Brunner ruling in 1987, the courts have generally determined that “additional circumstances” is effectively equal to disability.  Inability of a debtor to work due to long-term and/or permanent injury or disability meets the “additional circumstances” test.  In such cases, “good faith efforts” often interprete widely to mean any attempt to repay the loans. Thus, the longer and more consistent loan repayments are prior to bankruptcy, the better.

Recent Court Suggestions:

Some courts have suggested that other standards, such as a confluence of catastrophic events outside the debtor’s control (such as an unexpected divorce combined with illness of a child and loss of income) could constitute an “undue hardship”, particularly with past evidence of an intent to repay the loans, but until the Supreme Court rules on the issue, the Brunner test is still the most widely used.

A debtor must file an adversrial proceeding with the bankruptcy court to have student loans considered.  Presumably, student loans are non-dischargeable.  The Department of Education has, in the past, frequently contested such proceedings in an attempt to prevent discharge.  A Presidential Memorandum from President Obama in March of 2015 ordered the Department of Education to clarify the circumstances under which they would continue to challenge such filings.  On July 7, 2015, the Department released a memo stating that they would limit their challenges to cases where they disagreed that an undue hardship existed, and further, not pursue cases when the costs to fight the adversarial proceeding in bankruptcy court would exceed one third of the total amount of the loan due.

Practical Implications Of Undue Hardship Test:

While that sounds promising, it doesn’t actually represent any real change in the status of student loans and Oklahoma bankruptcy.  First, private loans aren’t covered by these guidelines at all, because the Department of Education has no control over them.  Second, while these guidelines are being publicly released due to Presidential Memorandum, they are essentially how things have operated for years.  None of these guidelines change federal law or particularly modify the Brunner test.

Therefore, for a non-disabled debtor, student loans, whether federal or private, are effectively exempt from discharge.  Disabled debtors have more options.  The Department of Education is issuing forgiveness for federal student loans if they determine that an undue hardship exists.  This loan forgiveness is technically outside the bankruptcy, but is often requested in conjunction with a bankruptcy filing.

If the Department of Education determines that an undue hardship does not exist, a disabled debtor could still file an adversarial proceeding to attempt to discharge the debts through the court, though, as suggested above the Department of Education will still contest those proceedings if it deems it to be in the financial interest of the government.  Private loans, even for disabled debtors, are still likely to be challenged in all cases;  more over, few, if any, private lenders provide a procedure or policy forgiving the debt for disabled debtors.

Current State of The Law:

In conclusion, despite Presidential memos and government guidelines, the best rule of thumb is that student loans are not dischargeable.  If you have a disability and believe that you may qualify to have your loans forgiven or discharged, speak to your bankruptcy attorney regarding this matter.

Student loans are a leading source of personal debt in the United States.  For many people who are exploring bankruptcy, student debt is a large portion, and in possibly, the majority of their debt.  Many potential bankruptcy debtors are unsure whether or not their student loans, federal or private, can be discharged.  Recent statements by the President and by the Department of Education concerning bankruptcy and student loans have further confused this situation.  It is important for potential debtors to have a clear understanding of what the laws and rules are concerning student loans before filing, so as to have clear expectations for what their financial situation will be post bankruptcy.

The basic law surrounding student loans in bankruptcy remains the same since the bankruptcy reforms of 2005.  Specifically, 11 USC §523(a)(8) states that any education loan made, insured, or guaranteed by the federal government cannot be discharged, “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.”  After 2005, that law also applies to any student loan made by a private entity.  Thus, any and all student loans, federal or private, are subject to a “undue hardship” test when a debtor seeks to discharge them in bankruptcy.

Definition of Undue Hardship:

Student Loans and Oklahoma Bankruptcy are vague regarding undue hardship. The statue does not define “undue hardship,” and the Supreme Court has yet to issue a ruling on the issue.  Thus, Federal Circuit courts determine the standards measuring undue hardship.  The most commonly used test comes from a New York case from 1987, Brunner v. New York State Higher Education Services Corp., (831 F.2d 395, 2d Cir. 1987).  In Brunner, the Second Circuit determined that an undue hardship consists of three factors:

1. Inability to maintain a minimal standard of living if forced to repay the loan.
2. Additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and
3. Debtor has made good faith efforts to repay.

This test is, in and of itself, vague, particularly “additional circumstances” and “good faith efforts.”  Since the Brunner ruling in 1987, the courts have generally determined that “additional circumstances” is effectively equal to disability.  Inability of a debtor to work due to long-term and/or permanent injury or disability meets the “additional circumstances” test.  In such cases, “good faith efforts” often interprete widely as any attempt to repay the loans.  Thus, the longer and more consistent loan repayments are prior to bankruptcy, the better.

Some courts have suggested that other standards, such as a confluence of catastrophic events outside the debtor’s control (such as an unexpected divorce combined with illness of a child and loss of income) constitutes an “undue hardship”, particularly with past evidence of an intent to repay the loans,  However, until the Supreme Court rules on the issue, the Brunner test remains the most widely used.

Adversarial Proceedings and Student Loans:

A debtor must file an adversarial proceeding with the bankruptcy court to have student loans considered.  Presumably, student loans are non-dischargeable.  The Department of Education has, in the past, frequently contested such proceedings in an attempt to prevent discharge.  A Presidential Memorandum from President Obama in March of 2015 ordered the Department of Education to clarify the circumstances under which they would continue to challenge such filings.  On July 7, 2015, the Department released a memo stating that they would limit their challenges to cases where they disagreed that an undue hardship existed, and further, not pursue cases when the costs to fight the adversarial proceeding in bankruptcy court would exceed one third of the total amount of the loan due.

While that sounds promising, it doesn’t actually represent any real change in the status of student loans.  First, these guidelines do not cover private loans since the Dept. of Education has not control over them.  Second, while these guidelines are public for the first time due to the Presidential Memorandum, they show essentially how the Department of Education operated for years.  None of these guidelines change federal law or particularly modify the Brunner test.

Therefore, for a non-disabled debtor, student loans, whether federal or private, are effectively exempt from discharge.  Disabled debtors have more options.  The Department of Education, in accordance with the guidelines it released on July 7, are issuing forgiveness for federal student loans if they determine that an undue hardship exists.  This loan forgiveness is technically outside the bankruptcy, but is often requested in conjunction with a bankruptcy filing.

If the Department of Education determines an undue hardship does not exist, a disabled debtor could still file an adversarial proceeding attempting to discharge the debts through the court.  Though, the Department of Education will still contest those proceedings if it deems it is in the government’s financial interest.  Private loans, even for disabled debtors, are usually challenged in all cases; and few, if any, private lenders use a procedure or policy forgiving the debt for disabled debtors.

In conclusion, despite Presidential memos and government guidelines, the best rule of thumb is that student loans are not dischargeable.  If you have a disability you may qualify to have your loans forgiven or discharged, speak to your bankruptcy attorney.

Free Consultation Regarding Student Loans and Oklahoma Bankruptcy:

If you have questions regarding student loans and Oklahoma bankruptcy call us today. At South Tulsa Bankruptcy Law Office we understand how hard a financial crisis is. We can help you get a chapter 7 fresh start or chapter 13 reorganization of your debt. Get a Free Consultation 918-739-8984