The whopping cost of college has left many young adults struggling to pay their student loans after they graduate and land a job. Now, with the coronavirus crisis upending the economy, a difficult task has become even more insurmountable. Many student loan borrowers may be facing a job loss. Others who still have their jobs are riddled with anxiety over whether they will be able to keep their job with a recession in the forecast. Without income, how will they be able to pay their student loans. The federal government has offered some assistance through the CARES (Coronavirus Aid, Relief, Economic, Security) Act by suspending principal and interest payments on federally held student loans through September 30, 2020. The federal government also reduced the interest rate to zero percent so you will not be accruing interest during this period. This offers some temporary relief but what happens after this expires and a person cannot pay his or her student loans. Will filing for bankruptcy help? Student Loans are typically non-dischargeable in a bankruptcy proceeding. There is an exception. You may seek to discharge your student loans if you can show the payment of the loans create an undue hardship. Well, this should be easy to meet. Indeed, paying student loans is an undue hardship unless you are earning a very substantial income. Unfortunately, this is not the case. To show undue hardship, the Second Circuit of the United States Court of Appeals implemented a three-prong test in a case entitled Brunner v. NY Higher Educ. Serv. Corp., 831 F.2d 395 (1987). The Court found that the debtor must demonstrate that: (1) the debtor cannot maintain, based on current income and expenses, a ‘minimal' standard of living if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor made a good faith effort to repay the loan. For a long time, bankruptcy courts have placed a very heavy burden on the debtor to meet these three elements, thereby making it nearly impossible to discharge student loans. This was until recently when a bankruptcy judge in the Southern District of New York relaxed the strict application of these three elements and found that a debtor met the burden of undue hardship and discharged the student loans .
This case provides us hope. We can rely on this court decision to assist a client in seeking a discharge of a student loan debt. The problem is filing a bankruptcy petition will not ignite the process in seeking to discharge your student loan debt. You must commence a lawsuit or what is known as an adversary proceeding seeking to determine the dischargeability of the student loan debt. The case will follow all the steps of a normal litigation case and this could be expensive and time consuming. Indeed, it will be met with vigorous opposition from the lender. Like any other lawsuit, the results are not guaranteed.
However, a bankruptcy filing should not be so quickly dismissed if you are saddled with student loans. Although it may not unload the burden of student loan debt, it can relieve a person from other financial obligations and free up some income to contribute toward student loans. In addition, some bankruptcy courts, like the bankruptcy court in the Southern District of New York, offer a mediation program before litigation for those having difficulty paying student loans. This will help you explore options with the lender such as a modification. Therefore, a bankruptcy may be a viable option for those with student loan debt by alleviating other financial woes and helping to create a more stable financial condition. Bankruptcy counsel can help you evaluate your options.
Kimberly Berson is a bankruptcy attorney with over 25 years of experience. She is also an assistant adjunct professor of legal studies and teaches Bankruptcy Law and Legal Research and Writing to future paralegals. You may contact her at kbersonlaw@gmail.com or 516-847-5122.
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