3 Factors Las Vegas Debtors Must Meet to Discharge Student Loans in Bankruptcy

One thing media discussions on student debt always include is that student debts aren’t dischargeable in bankruptcy. Unfortunately for many people seeking the counsel of a Las Vegas bankruptcy lawyer, their student loans will probably not be dischargeable in bankruptcy. However, technically this isn’t absolutely true according to the bankruptcy code. Sometimes student debts are dischargeable in a Chapter 7 bankruptcy. It’s just exceedingly difficult to pull off.

The petitioner must meet what’s called the “undue hardship test,” which refers to the portion of the bankruptcy code that states, “[T]his title does not discharge an individual debtor from any debt … unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for [educational loans].” (11 U.S.C. § 523 (a)(8) [http://www.law.cornell.edu/uscode/text/11/523]) The question is, what does “undue hardship” mean here? The statute doesn’t provide a definition, leaving the bankruptcy courts to interpret it, and interpret it they have, as in the 1987 case, Brunner v. New York State Higher Education Services Corp. The 2nd Circuit Court of Appeals (NY, CT, and VT) created a three-prong test for the debtor to demonstrate “undue hardship.” The debtor must demonstrate:

(1) She cannot maintain a minimal standard of living for herself or her dependents if forced to repay the loan,

(2) Circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period, and

(3) The debtor has made a good faith effort to repay the loan.

To make things more complicated, not all courts use the Brunner test. In the 1st Circuit (ME, NH, MA, and RI) and 8th Circuit (SD, ND, NE, MN, IA, MO, and AR), the “Totality of the Circumstances Test” prevails, which requires the debtor to prove by a preponderance of the evidence that:

(1) The debtor’s past, present, and reasonably reliable future financial resources;

(2) The debtor’s and all dependants’ reasonably necessary living expenses; and

(3) All other relevant facts or circumstances unique to the debtor’s case that prevent the debtor from paying the student loans in question, while still maintaining a minimal standard of living.

Although the Totality of the Circumstances Test gives the bankruptcy judge a lot of leeway, unfortunately the 9th Circuit, which includes Nevada, uses the more restrictive Brunner test. Thus, if you have a lot of student loan debt, it will probably be harder for you to discharge your loans than in other states. That’s not a reason to give up hope. A Chapter 7 Las Vegas bankruptcy can help you discharge other debts quickly, or you might benefit by placing your student loans in a Chapter 13 repayment plan with the hope that your income will be greater in three to five years.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-745-8584 to set up your free consultation.