Debt from student loans continues to increase in California and across the nation. Nationwide, students who graduated from college in 2013 had an average debt burden of $28,400. This is up from 2012 and is expected to grow in the future. This growth will add to the nearly $1 trillion in student loan debt that the country currently carries.
While student loans open educational opportunities for nearly everyone, there are dangers associated with taking them out. Some of those dangers include the ease with which students are able to borrow large sums of money, high interest rates when payment on the loans begin, and difficulty in discharging student loans in bankruptcy.
California and Student Loans
One of the most common misconceptions about student loans is that they cannot be discharged in bankruptcy or that it is too difficult to attempt. That is not entirely true, and new developments in the law and regulations may be paving a way that will ease some of the current restrictions on discharging student loans in bankruptcy cases.
Federal bankruptcy laws put limits on they types of debt that can be discharged in a bankruptcy, and student loans insured or made by the government have some of those restrictions. 11 U.S. Code § 523(a)(8) says that student loans can only be discharged when payment of the student loans represent an “undue hardship” on the holder of the debt. But what does “undue hardship” mean under the law in California?
In 1998, the 9th Circuit Court of Appeals adopted a three step test to determine whether student loans represented an undue hardship on debtors. In United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108 (9th Cir. 1998) the federal court of appeals over California determined that student loans could be discharged in a bankruptcy when:
- The debtor could not maintain a minimal standard of living for herself and her dependents unless the debt were discharged.
- The debtor’s circumstances are such that this situation is likely to continue into the future.
- The debtor has made good faith efforts to pay back the loans.
Known as the Brunner Test, this three-pronged approach to discharging student loans has been criticized since its inception. In 2013 a bankruptcy judge from the 9th Circuit said that this approach is “too narrow, no longer reflects reality and should be revised.”
Department of Education Issues New Bankruptcy Guidelines
In July of 2015, the Department of Education released new guidelines for bankruptcy procedures. The new guidelines provides a history of what “undue hardship” has come to mean in the courts, and then goes on to provide guidelines for bankruptcy attorneys, debt holders, and courts to use in determining whether a loan should be discharged. Included in the new guidelines are a focus on:
- Balancing of the duties and hardship of the debtor.
- Case-by-case analysis of whether an undue hardship exists.
- The undue hardship that exists versus how much it would cost to defend a bankruptcy petition in court.
These new guidelines are a first step in changing how students loans are approached in bankruptcy proceedings. Hopefully the guidelines will make it easier for those suffering an undue hardship under their student loans to get them discharged.
As you can see, bankruptcy laws can be complicated and change from day to day. That is why it is so important to have a true bankruptcy attorney on your side as you go through the bankruptcy process. Contact us so we can evaluate your case and give you your legal options. At The Bankruptcy Law Center we will focus all our efforts on your case and situation.