Discharge of Student Loan Debt in Bankruptcy

If you’re alive you know that college student loan debts are not dischargeable in bankruptcy. That’s true most of the time but not all of the time. There’s this thing called the “Brunner Test” which, if you qualify, allows you to discharge at least some if not all of your student loan debt. It’s a three-part test.

(1) You must demonstrate that making loan payments would prevent you from maintaining an acceptable living standard. (2) You also must show that your financial condition is likely to last for most of the remaining loan period, and (3) You must show that you have made a “good faith” effort to repay the loans.

The discharge of other kinds of debts merely requires one to show that their net worth is less than the amount of the debts. One’s net worth is then liquidated and funds derived therefrom are paid into the court and distributed proportionately to creditors with valid claims. One then will have what is called a “fresh start.” Another bankruptcy case cannot be instituted until 6 years have elapsed.

Heretofore, Bankruptcy Courts have construed the Brunner test in student loan relief narrowly. This has resulted in most people believing it is impossible to discharge student loans. A recent case departs from a harsh interpretation of Brunner and adopts a more reasonable standard for applying it. Thus, Kevin Jared Rosenberg was successful in discharging his $220,000 student loan debt in an opinion by Judge Cecelia Morris, Chief Judge in the U.S. Bankruptcy Court for the Southern District of New York. You can access Judge Morris’ opinion here: http://www.abajournal.com/files/RosenbergBankr.pdf

I believe discharge of student loan debt should be allowed in Bankruptcy Court by the same rules that apply to any other debt. I also agree with Glenn Reynolds that the institutions that got the money should have to disgorge some or all of it when that happens.

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