Michigan Bankruptcy Lawyer

This is an issue near and dear to my heart, as, having gone to law school somewhat later in life after a lengthy career as a graphic designer, I myself will most likely die of old age long before my own student-loans are paid off. Some of the problems and causes of students’ wildly increasing student loan bills were discussed yesterday on NPR’s On Point show with author Alan Michael Collinge, whose new book, The Student Loan Scam, discusses the unholy relationship between student loan lenders, university financial aid administrators, and the US Congress in a most enlightening and, sadly, disheartening, manner. In his radio interview, Collinge explicitly addressed one of the most egregious problems with student loans as a rising component of Americans’ escalating debt-loads: namely, that, for all intents and purposes, they are not dischargeable in bankruptcy, either in Chapter 7 or Chapter 13.

If you’re interested in hearing more about why this is so and how this situation came about, I highly recommend listening to Collinge’s interview and reading his book, particularly if you are a parent with children approaching college-age or if you, as I was, are looking to make a mid-career transition and are considering returning to school full-time in order to do it. What I will discuss in the remainder of this post is the actual impact of student-loan debt within the bankruptcy process.

Student loans are specifically excepted from the discharge of debts resulting from a successful bankruptcy petition by section 523(a)(8) of the US Bankruptcy Code.  This section contains several important components to those considering bankruptcy.  It covers:

• Any educational benefit overpayment or loan that is …
• Made, insured, or guaranteed by the government or a governmental unit …
• Or also any obligation to repay funds received as an educational benefit, scholarship, or stipend …
• Or any other educational loan defined as a “qualified education loan” by section 221(d)(1) of the Internal Revenue Code of 1986.

Thus, any debt which falls into part or all of this provision is unable to be discharged by bankruptcy—unless, as section 523(a)(8) states at its outset, the debt causes an “undue hardship” on the debtor or the debtor’s dependents. Additionally, section 221(d)(1) of the Internal Revenue Code also defines a “qualified education loan” as any debt incurred solely to pay for higher education expenses. The two primary arguments that a student loan should be discharged in any given circumstance, therefore, are that (1) the debt causes an undue hardship and (2) the debt is not the result of a “qualified education loan.” There are other associated and included conditions as well, but these are the general arguments available.

Both, however, offer extremely high bars to discharge.

As to the undue hardship argument, the courts have rendered multiple decisions on the subject that make it very difficult to establish that an “undue hardship” has indeed been imposed by the debt. The basic test (known as the Brunner Test) for undue hardship is:

• If the debtor is unable to maintain a “minimal” standard of living for the debtor and his or her dependents based on current income and expenses;
• If the debtor’s general circumstances indicate that this state of affairs isn’t likely to change throughout the life of the loans;
• And if the debtor has made good faith efforts to repay the loans.

It doesn’t sound that difficult, but, time and again, courts have ruled against debtors seeking discharge on this basis. Very low-income debtors have the best chance of success.

The argument that the loan is not a “qualified education loan” is a possibility when a loan has been used for living expenses in addition to “higher education expenses,” but the possibility that an argument based on this statutory wording will result in a complete discharge is uncertain at best.

There are, however, many additional arguments to be made on a case-by-case basis, and a knowledgeable bankruptcy attorney should be able to determine whether your student loans are, as most unfortunately indeed are, truly non-dischargeable. Under some circumstances, particularly when a debtor is attempting to provide for dependents on a very low annual income, discharge may remain a possibility, albeit, as Alan Michael Collinge argues, a very slim one.

If you have any questions about your student loan or any other debt, please contact me to schedule a free, initial consultation.