Undue Hardship Claims & The (Non-)Dischargeability of Student Loan Debt
Student Loan Disbursements Exempt from Bankruptcy
Pursuant to 20 U.S.C. § 1095(d), student loans, grants, and work awards cannot be taken, via garnishment, attachment, or otherwise, by creditors to satisfy any debts owed by the student. While some states have opted out of the federal bankruptcy exemptions, every state must allow debtors the option to use applicable state and federal non-bankruptcy exemptions.
(Non-)Dischargeability of Student Loan Debt
As of October 7, 1998, Title 11 U.S.C., Section 523(a)(8)(A) of the bankruptcy code no longer permits discharge of student loans regardless of the length of time the loan has been in repayment. The bankruptcy code had previously allowed discharge of some if it had been in repayment more than 7 years.
However, discharge in the case of undue hardship still applies under 11 U.S.C., Section 523(a)(8). Collection of student loans will cease during the pendency of bankruptcy. Unless a complaint is filed claiming that student loan repayment would cause undue hardship, collection will be established or resumed after notice of general discharge.
Congress never defined what is necessary to prove undue hardship to discharge student loan debt, nor did it delegate this power to the Department of Education. Therefore, it has been left to the courts to establish the standard for undue hardship. In February 2018, DOE put out a request for information in order to solicit suggestions for a new standard for the evaluation of claims to discharge student loan debt in bankruptcy due to undue hardship.
*In general, debt holders & DOE contractors aggressively block undue hardship claims via litigation. While consumer advocates seek a broadened standard to extend relief to more borrowers
Evaluating Undue Hardship Claims
In May 2018, the American Bankruptcy Institute Commission on Consumer Bankruptcy published recommendations for new legislation and interpretation of case law regarding the evaluation of undue hardship claims to discharge student loan debt in a bankruptcy. These recommendations are one part of a larger set of cohesive recommendations to enable more efficient treatment of student loans. The American Bankruptcy Institute recommended that the DOE establish:
(a)Bright-line Rules with specific criteria for undue hardship, to include disability- and poverty-based guidelines;
(b)Avoidance of Unnecessary Costs, creditors should exercise discretion when evaluating evidence submitted by debtors and must use informal over formal discovery processes whenever possible; &
(c)Alternative Payment Plans
The American Bankruptcy Institute recommended interpretation of Title 11 U.S.C. Section 523(a)(8) using the three factor Brunner Test:
(1) debtor cannot pay,
(2) debtor will not be able to pay while maintaining a reasonable standard of living, and
(3) debtor has not acted in bad faith in failing to repay prior to the bankruptcy.
KEYWORDS: Student Loan(s), Undue Hardship, Brunner Test, American Bankruptcy Institute, ABI, Title 11 U.S.C. Section 523(a)(8), Department of Education, DOE, Non-Dischargeable Debt