“Nondischargeable” student loans: if you can’t beat ’em . . . err, try again, and at least you can beat your other debts

In recent years, the old adage that nothing is certain in life, save death and taxes, has grown to include a third unavoidable certainty: student loans.  American students – including myself – have signed on the dotted line, many of us only days past our eighteenth birthdays, sentencing ourselves to at least a decade of educational debt controlling so many of our choices, from the choice of whether, where and when to attend graduate school, to whether and when to have children.  Most of us came into this debt with optimism and youthful exuberance.  When I took out my first educational loan, it was 1997.  I was using the money to attend a good college.  I had limitless potential and energy, and I believed that the economy would continue to be robust.  We all did.

Fast-forward 15 years, and though I indeed graduated, with honors, my first job was as a teacher in an expensive metropolitan area.  My next career move took me on a path that could prove lucrative, but my entry-level position was low-paying.  As the economy began its slow slide from those halcyon days of the ‘90s, my career path became less secure, and I made a decision that was generally regarded, at that time, as being one of the most prudent for long-term financial stability: I went to law school.  By the time I graduated in 2008, we were in a full-blown recession.

Unfortunately, a law degree just isn’t worth what it used to be.  Students in disciplines running the gamut from film theory to medicine are learning that a recession-proof degree is a myth.  Even more unfortunately, so many of us have paid dearly for those degrees, and will continue to pay disproportionate amounts of our monthly incomes toward repayment of our student loans, or else default.

While the Bankruptcy Code provides relief and a “fresh start” for debtors who owe just about any kind of debt, the debtor with educational loans who wishes to get out from underneath the crushing debt is usually out of luck.  Fearing that millions of students would borrow tuition money, earn their degrees and then immediately file for bankruptcy protection to get out of repaying those obligations spurred Congress to enact legislation barring all but the most unfortunate debtors, those with a verifiable “undue hardship,” from discharge of their student loans.  Congress never defined what “undue hardship” means, but here in the Second Circuit (New York, Connecticut and Vermont), debtors wishing to discharge their student loans must meet the stringent Brunner Test, named after the landmark case Brunner v. New York State Higher Education Services Corp., 831 F. 2d 395 (2d Cir. 1987).

In Brunner, the court adopted a three-pronged standard debtors must meet for discharge of their student loans.  First, a debtor must show that, if the debtor is forced to repay her student loans at her current level of income and expenses, she will be unable to maintain even a minimal standard of living for herself and her dependents, consisting of little more than food, shelter and medical insurance.  Second, the debtor must show that these circumstances are permanent, or at least likely to persist for a “significant portion” of the remaining repayment period.  Third, the debtor must show that she has made good faith efforts to repay the loans.

Generally, the Brunner test has been applied very strictly.  Here in the Southern District of New York, in the case Bacote v. Educational Credit Management Corporation, 2006 WL. 3732993 (Bankr. S.D.N.Y. 2006), the recently-retired Chief Bankruptcy Judge Arthur J. Gonzalez denied the discharge of the student loans of a 56-year-old unemployed debtor caring for her elderly, disabled husband because her employment options, though decidedly limited, were not completely foreclosed, and because her spotty repayment history did not sufficiently demonstrate good faith.  In a more recent Second Circuit case, this one coming from the District of Connecticut, In re Traversa, 2011 WL 5110214 (2d Cir. 2011), a debtor who had been unemployed since 2004, suffered from mental illnesses and sleep disorders and received monthly social security disability income of only $1,500 was denied the discharge of his student loans when he could not show that his condition was “likely to persist for a significant portion of the repayment period.”  This had led many in the legal profession to theorize, only partly in jest, that you could be a blind quadriplegic living in a box in Central Park with no income of any kind, and you will still never be out from under your student loans.  Theoretically, unless you are dead or in a persistent vegetative state (and even then, some still maintain hope!) there is still a chance you can be cured, no matter how unlikely.  Oh, and you could also win the lottery.  That might happen, too.

Not surprisingly, the onerous burden placed on would-be dischargers of student loan debt has dissuaded even the most economically disadvantaged from even attempting to obtain a ruling of undue hardship.  According to a recent New York Times article, fewer than 1,000 debtors across the country even attempt to bring undue hardship adversary proceedings as part of their bankruptcy cases.  That’s a very small subsection of the tens of millions of Americans currently struggling to repay their student loans.  However, some researchers at Emory University School of Law recently crunched the numbers, and determined that 57% of debtors who initiated adversary proceedings to discharge their student loans were able to get at least a portion of such loans discharged.  Another researcher from Princeton found that 39% of debtors receive at least partial discharges of student loans.  Perhaps these numbers are skewed, in that only debtors in the most dire of circumstances even attempt to obtain discharge of their student loan debts.  Yet, these figures do offer at least a small ray of hope in an otherwise defeatist and pessimistic area of bankruptcy law.

Even if a discharge, or partial discharge, of student loan debts is not ultimately possible, debtors who are struggling to repay educational as well as consumer debts should still consider bankruptcy as an option.  If a debtor is burdened with monthly debt repayment of, say, $2,000, representing $500 in student loan payments and $1,500 in credit card and other consumer debt, freeing up monthly disposable income to pay down the educational debt, without the crushing burden of the other debt, could be enough to get that debtor’s head back above water.  Just because bankruptcy may not eliminate the full extent of the debt in order to give the debtor a complete “fresh start,” it may still offer enough relief to give the debtor a “fresher start,” and may still be a viable option for those with educational debts.

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