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Student Loan Law: 15.7.7.1 Generally

In November 2022, the Department of Justice (DOJ), working in close coordination with the Department of Education, announced “a new process for handling cases in which individuals seek to discharge their federal student loans in bankruptcy.”621 The DOJ also issued guidance for attorneys handling the new process.622 This guidance is the product of several years of negotiations involving consumer advocates and staff at the DOJ and Department of Education.

Student Loan Law: 15.3.2 Parents and Other Co-Signors

Most courts find the exception to discharge for student loans applies not only to student borrowers but also to parents, spouses, or non-relatives who co-sign a student loan.203 Early on, the courts were divided over this question.204 The arguments in favor of excluding co-obligors from the discharge exception focused on several rationales.

Student Loan Law: 15.3.3 Reimbursement Claims by Individuals Are Not Student Loans

Dischargeability disputes have arisen between two individuals who were responsible for paying the same student loan. For example, one co-borrower who paid off a student loan may assert a claim for reimbursement from the nonpaying co-borrower. If the nonpaying co-borrower files for bankruptcy relief, does the co-borrower who paid off the loan have a claim that fits within the discharge exception of section 523(a)(8)?

Student Loan Law: 15.4.1.1 Generally

Because most student loan debt falls within one of the categories under section 523(a)(8), most bankruptcy debtors who seek to discharge these debts will face the question of whether they meet the Code’s “undue hardship” standard.

Student Loan Law: 15.4.1.2 The Brunner Test

All courts of appeals except the First and Eighth circuits have adopted the three-prong test for determining undue hardship set forth in the Second Circuit’s 1987 decision in Brunner v.

Student Loan Law: 15.4.1.3 The “Totality of the Circumstances” Test

The Eighth Circuit has endorsed a “totality of the circumstances” test for determining undue hardship.241 This test considers (1) the debtor’s past, current, and reasonably reliable future financial resources;242 (2) the debtor’s and the debtor’s dependents’ reasonable necessary living expenses;243 and (3) any other relevant facts and circumstances applicable to the bankruptcy case.244 The First Circu

Student Loan Law: 15.4.2.1.1 Overview

The three-part Brunner test begins with a consideration of the debtor’s current financial condition. While the second Brunner prong focuses on expectations for the future and the third prong examines past conduct, the first prong examines the debtor’s circumstances at the time the court makes the dischargeability determination.257 The debtor must be unable to maintain a “minimal” standard of living for themself and their dependents and still repay the student loan.

Student Loan Law: 15.4.2.1.2 Can the borrower afford to repay the loan?

The first prong of the Brunner test asks two questions: (a) is the debtor able to maintain a minimal standard of living now, and, if yes, (b) would the debtor be able to do so if they had to repay the student loans?258 Other prongs of the Brunner test, discussed in the following sections, consider whether the debtor’s financial situation is likely to improve in the future and whether the debtor has taken reasonable steps to maximize current income.

Student Loan Law: 15.4.2.1.3 Long-term income-driven repayment plans should play no role under the first Brunner prong

The first Brunner prong asks whether the debtor can maintain a minimal standard of living “if forced to repay the loans.”260 The Brunner court did not frame the question as whether the debtor can maintain a minimal standard of living and possibly obtain forgiveness of the loans twenty or twenty-five years in the future after completing a long-term income-driven repayment plan.261 The relationship between these plans and the bankruptcy undue hardship standard is considered in mo

Student Loan Law: 15.4.2.1.4 What is a “minimal” standard of living?

Most courts agree that the minimal standard of living contemplated by Brunner allows the debtor to pay for basic necessities. These include food, clothing, decent housing, utilities, communication services, transportation, and health insurance or the ability to pay for medical and dental expenses. There is little agreement among the courts as to what levels of expenditures for these items are consistent with a minimal standard of living.

Student Loan Law: 15.4.2.1.5 The role of the debtor’s assets

Under both the Brunner and “totality of the circumstances” tests, student loan creditors may point to the debtor’s ownership of certain assets, such as a home, car, or retirement account.319 The creditors may argue that, if liquidated, these assets could pay off all or part off a student loan debt. In reality, the liquidation might only exacerbate the current hardship, forcing the debtor into more expensive housing or causing job loss due to lack of transportation. Furthermore, if the asset can be claimed as exempt, 11 U.S.C.

Student Loan Law: 15.4.2.1.6 Whose income and expenses count?

The first Brunner prong looks at whether the debtor can repay the loan and provide a minimal standard of living not only for the debtor but also for the debtor’s dependents.323 The term “dependent” as used in section 523(a)(8) is not limited to individuals, such as minor children, whom the debtor has a legal obligation to support.324 For example, a hardship related to a family member can arise when the debtor provides home-based care for an infirm parent or non-dependent adult child wit

Student Loan Law: 15.4.2.2.1 Overview

Under the second prong, the court evaluates any “additional circumstances” that make it more likely than not that the debtor’s current state of affairs will continue for the remainder of the loan’s repayment term. The court must not only evaluate a wide range of current facts but must also predict whether those facts are likely to change. There are two aspects to this prong. First, the borrower must show some additional circumstances indicating that the current conditions will continue and not improve.

Student Loan Law: 15.9.4 Separate Classification of Student Loan Debts in Chapter 13 Bankruptcy

Many courts have found separate classification of student loan debts in chapter 13 bankruptcy to be fair.720 In applying the multi-factor tests for fairness, these courts emphasize certain key features of student loan debt. For example, allowing nondischarged student loan debt to increase significantly discourages repayment and compromises the important “fresh start” goal of the Bankruptcy Code.

Bankruptcy Basics: Exemptions

In keeping with the “fresh start” purpose of bankruptcy relief, debtors are permitted to claim certain property as exempt in the bankruptcy process and are allowed to retain this property after bankruptcy free from most creditor’s claims. 11 U.S.C. § 522(b), (c). Section 522(d) lists the exemptions available under the federal exemption scheme. In some states the debtor is given a choice between using either the state exemptions or the federal bankruptcy exemptions (in a joint case, both spouses must choose the same exemption scheme).

Bankruptcy Basics: Discharge

The primary goal of most consumer bankruptcies is the discharge of debts, thereby providing the debtor with relief from creditor collection actions and an opportunity for a fresh start. As discussed below, the discharge in a chapter 7 or chapter 13 case comes at the conclusion of the case, which may be approximately four months after filing in a chapter 7 case and generally three to five years after filing in chapter a 13 case.

Bankruptcy Basics: Evaluating the Dischargeability of Debtor’s Student Loans

Section 523(a)(8) provides that student loans can only be discharged if the debtor demonstrates that not discharging the debt “will impose an undue hardship on the debtor and the debtor’s dependents.” Many bankruptcy courts have adopted a three-prong test for determining undue hardship, based on the decision in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). The Brunner test requires the debtor to show that:

Bankruptcy Basics: Overview of Chapters 7 and 13

The Bankruptcy Code provides for two main types of consumer cases: chapter 7 and chapter 13. The debtor will need to decide which chapter is better for them. Although the debtor may be able later to convert from one type of bankruptcy to another, it is always best to give this choice due consideration from the start.

Types of Consumer Bankruptcy Cases

Chapter 7

Bankruptcy Basics: Income Eligibility.

To be eligible for a chapter 7 filing fee waiver, the debtor’s income must be less than 150% of the applicable official poverty line based on family size. The poverty line figures used are those provided by the Office of Management and Budget, and are revised annually in accordance with section 673(2) of the Omnibus Budget Reconciliation Act of 1981.

Collection Actions: 3.2.1 Does the Court Have Jurisdiction?

Except in unusual circumstances, there is no federal jurisdiction for a collection action, and collectors must bring the case in state court. This also means that consumers cannot successfully remove the case to federal court. Raising a federal claim in a counterclaim is not a basis to remove a case to federal court.1

Collection Actions: 3.2.2.1 Limitations on State Court Venue

A collector’s action must comply with state venue rules and also with the federal Fair Debt Collection Practices Act (FDCPA). The FDCPA requires that a debt collector bring a lawsuit only in the judicial district in which the consumer signed the contract or resides at the time of the lawsuit.7 The judicial district refers to the state district and not the federal district.8

Collection Actions: 3.2.2.2 Implications of a Collection Suit Brought in Violation of Federal or State Limits

If a collection action is brought in a venue violating the FDCPA, the consumer has an action for actual and statutory damages and attorney fees under the FDCPA19—and may also have a cause of action under the state deceptive practices statute. But the availability of such a damage action does not resolve the question of whether the federal or state law violation can be grounds to dismiss or move a collection action brought in a venue violating the federal or state standard.