Can I Bankrupt My Student Loan?

Student loans are not discharged in a bankruptcy proceeding unless repayment of the loan will create an undue hardship for the debtor or the debtor’s dependents.  The bankruptcy code prevents student loan discharge in most cases.

Many courts, including the Oregon bankruptcy court, have adopted a test formulated in 1987 by the Court of Appeals for the Second Circuit and often referred to as the “Brunner Test” to determine the dischargeability of a student loan.

When the bankruptcy law was extensively revised in 1978, private student loans were freely dischargeable.  However, guaranteed student loans could only be discharged if repayment created an undue hardship or if the borrower had been making payments on the loans for at least five years.

The law was later changed to require payment of a student loan for seven years before discharge was possible.  In 1998 the seven year payment option was eliminated.  This left only undue hardship as grounds for discharge of government guaranteed student loans.

The biggest problem with the undue hardship requirement was that congress did not tell the courts what undue hardship means. The court in the Brunner case decided it must require more than just ordinary garden variety hardship, and added some of its own requirements.  Not only did the court require that the debtor was unable to pay the student loans and maintain a minimal standard of living, it required the debtor to have made an effort to pay the loans and show other circumstances that indicate the debtor would not be able to repay the loans in the future.  Other courts followed suit and adopted these additional requirements.

The student loan discharge restriction originally applied only to government guaranteed student loans.  When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became law, private student loans were included in the discharge prohibition.