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Are bankruptcy courts becoming more forgiving toward student loan debt?

On Behalf of | Jun 24, 2020 | student loan debt |

It has long frustrated many, including personal finance guru Suze Orman, why someone can use bankruptcy to eliminate debt racked up on cars, clothes, travel and other nonessentials, yet student loan debt is pretty much stuck to you for life.

Individuals have received temporary relief on unmanageable student loan debt during the COVID-19 outbreak, as federal student loans have been automatically placed in administrative forbearance, allowing borrowers to stop making their payments without penalties or interest accruing. That is scheduled to end on Sept. 30, 2020.

The move to make student loans dischargeable

It is estimated that 45 million Americans have student loan debt and owe collectively $1.6 trillion. Many financial experts say that en masse defaults on that mountain of debt is the next economic crisis waiting to happen. Lawmakers, including Massachusetts Sen. Elizabeth Warren, are pushing for changes to federal laws that will make it easier to discharge student loan debt through bankruptcy.

Most bankruptcy courts apply what is known as the Brunner test, which was established in 1987 to determine whether student debt can be discharged in bankruptcy. The Brunner test considers whether:

  • A borrower is unable to maintain a “minimal standard of living” for himself and any dependents if forced to repay the loan
  • There are extenuating circumstances that create a hardship and are likely to persist
  • The borrower has made good faith attempts to repay the loan

A change in court attitudes?

There are signs that some courts are heading in that direction. Early this year, a U.S. bankruptcy judge in New York ruled that a 46-year-old man whose student loan debt had ballooned to more than $220,000 could discharge that debt in Chapter 7 bankruptcy.

In her ruling, Chief U.S. Bankruptcy Judge Cecelia Morris of the Southern District of New York explained that she was applying the Brunner test in the manner it was intended, not in the punitive manner that had been established by other courts.

There is no guarantee that courts nationwide will adopt the more lenient interpretation of the Brunner test. According to the Wall Street Journal, about 250,000 student loan borrowers file for bankruptcy each year and only about 400 seek to discharge their student debt. However, if more bankruptcy court judges fall in line with Judge Morris’ interpretation of the Brunner test, it could become an important transformation for those saddled with unmanageable student loan debt.

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