Can You Discharge Student Loans in California?

Bankruptcy courts make it difficult, but some student loan holders will qualify

By Doug Mentes, Esq.

Several hundred thousand student loan borrowers file for bankruptcy each year in the U.S. Those borrowers make up about one-third of all bankruptcy filers. However, less than 1 percent seek discharge of their student loans. This is likely because student loans are treated unique under the bankruptcy code compared to other forms of debt. For those considering seeking a discharge of their student loans in bankruptcy, they must understand that uniqueness makes for an expensive and time-consuming process.

However, there may be hope for those who find the means to pursue a student loan discharge. A recent study showed that 50 percent of student loan borrowers who attempted to discharge their student loans in bankruptcy received a partial or full discharge of their student loans.

Student loans can be discharged through bankruptcy

It’s possible to discharge a student loan under the bankruptcy code, but bankruptcy filers must clear an extra hurdle to receive that discharge. The law requires the bankruptcy court hold a hearing or trial on the issue of discharge of the student loans alone. That hearing is called an “adversary proceeding,” which takes place within the bankruptcy case. The bankruptcy filer will have the burden to prove that excluding the student loans from their bankruptcy discharge will cause them “undue hardship.” It is often necessary that the bankruptcy filer hire an expert witness to demonstrate undue hardship for the court—a significant expense for someone who is struggling financially.

Student loan holder must prove undue hardship if forced to pay student loans

Undue hardship is proven by the bankruptcy filer (or debtor) meeting three criteria—those three criteria are referred to by the bankruptcy court as the “Brunner test.”

  1. Continuing to pay the loan must cause the borrower to be unable to sustain a minimum standard of living
  2. The borrower's financial situation must be unlikely to change in the future
  3. The borrower must have made a good-faith effort to pay his or her loans

What is a minimum standard of living?

The debtor will submit schedules with the bankruptcy petition that show their income and reasonable expenses. A minimum standard of living includes expenses for shelter, utilities, food and personal hygiene, clothing, health insurance or ability to pay medical and dental expenses—and even some recreation. The essence of the minimum standard of living requirement is that a debtor, after providing for his or her basic needs, may not allocate any of his or her financial resources to the detriment of student loan creditor. If after paying the basics a debtor has little to nothing left over, that should meet this first criteria.

Situation unlikely to change for borrower

To satisfy the second criteria, the debtor’s financial situation must be indicative of a certainty of hopelessness, not merely a present inability to pay bills. The circumstances often include one or more of the following:

  • illness
  • disability
  • lack of job skills
  • existence of dependents

A debtor should be able to demonstrate their situation is permanent and not just a temporary problem. Also, the circumstances must be beyond the debtor’s control, not borne of free choice.

Debtor must make good faith effort to pay loans

To determine whether a debtor has made a good faith effort to pay their student loans, the bankruptcy court will look at payments made, or attempts to work with lender on alternate payment plans. If the debtor can demonstrate an honest, sincere intention to pay their student loans that should satisfy this third requirement of the Brunner test.

If a student loan holder is considering filing for bankruptcy, that borrower should consider including the student loans within their bankruptcy filing. But because of the complexity of the student loan discharge process, those borrowers should first consult an experienced southern California bankruptcy attorney to determine their best chance of successfully obtaining that discharge.

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