During the current coronavirus crisis, roughly 90 percent of student loans borrower are not making their full payments. Typically, recent graduates are at or near the bottom of the corporate ladder. And, most companies follow the “last hired, first fired” rule. So, recent graduates are hurting more than some other groups. Banks do not care. They just want their money. And, the law in this area is rather unfriendly in Georgia.

Bankruptcy eliminates most unsecured debts, a financial category which includes student loans. These borrowers simply promised to repay the money. Legally, however, student loans are priority unsecured debts. As such, they are only dischargeable in certain circumstances. Other priority unsecured debts include back taxes, which are also semi-dischargeable, and FSOs (Family Support Obligations, like child support), which are never dischargeable.

Nevertheless, if a Georgia bankruptcy lawyer formally requests student loan relief, most debtors get at least a partial discharge. Other relief, such as payment deferral or a reduced interest rate, might be available as well. So, bankruptcy is not a magic wand which clears student loans. But it can, at the very least, significantly reduce this debt load.

The Brunner Rule

Before 1982, student loans were not priority unsecured debts. As such, they were always dischargeable in bankruptcy, unless there was evidence of fraud or some other extreme circumstances.

As Congress debated revisions to the Bankruptcy Code in the early 1980s, there was a feeling, among some, that Vietnam War protestors borrowed their way through school beginning in the mid-1960s, and that these students never intended to repay their loans. Other lawmakers thought this idea was silly. Therefore, Congress directed that student loans were only dischargeable in bankruptcy if the debtor showed an “undue hardship.” Congress intentionally left this phrase undefined.

The definition came in 1987’s In Re Brunner, a case from the Second Circuit Court of Appeals. For debtors, the case could not have been much worse.

Marie Brunner graduated with a master’s degree in social work in 1982. During school, she accumulated about $9,000 in student debt. Even in the early 80s, that was not an eye-popping amount of debt. Nevertheless, Brunner made almost no effort to repay the loans. She did not ask for a deferral or any other relief from the lender. Instead, she almost immediately filed for bankruptcy, seeking a complete discharge.

Rather predictably, the court came down hard on Brunner. The Second Circuit defined an undue hardship as:

• Inability to repay the loans and maintain a minimal standard of living (i.e. above the poverty line),
• Prior good faith effort to repay the debt, and
• Permanent or long-term inability to repay the loans.

Essentially, the Brunner Rule requires a severe physical or other disability which occurred after the debtor borrowed the money.

The totality of the Circumstances

The Brunner Rule is still the law in the Eleventh Circuit, which includes Georgia. However, the winds appear to be changing, mostly because of the aforementioned student loan debt crisis.

A growing number of circuits have replaced the Brunner Rule with a more lenient totality-of-the-circumstances test. As the name implies, this measuring stick considers a number of factors, such as the debtor’s income, debt load, choice of career, and family status. As a result, it is easier for student loan borrowers to obtain relief in bankruptcy, even in jurisdictions which still follow the Brunner Rule.

Georgia Bankruptcy Attorneys and Procedural Issues

To obtain this relief, an attorney files a motion seeking discharge with the court. When that happens, many bankruptcy judges refer the matter to mediation, either on their own or upon the request of a Georgia bankruptcy lawyer.

During mediation, creditors have a legal obligation to negotiate in good faith. They must be willing to make meaningful sacrifices and resolve the matter. They cannot simply recite the Brunner Rule and say “I’ll see you in court.”

As mentioned, that negotiated settlement often involves a partial discharge along with some long-term payment relief.

It is also possible to deal with student loan delinquency directly through a Chapter 13 bankruptcy. The Automatic Stay immediately stops wage garnishment and other adverse actions. Then, debtors have up to five years to make catch-up payments and bring their loans current. Future on-time payments quickly rebuild credit ratings. And, a Georgia bankruptcy attorney can still negotiate with lenders and obtain relief like a reduced interest rate.

What If the Court Decides Repayment Will Cause Undue Hardship?

If you file an “adversary proceeding” to request the bankruptcy court discharge your student loans, you must prove it would cause undue hardship for you and your dependents. What happens next depends on the bankruptcy court’s determination regarding your case. The terms could include one of the following situations:

• The loan could be fully discharged, meaning you are no longer responsible for repaying any portion. Collection activities will stop.
• The loan could be partially discharged, requiring you to repay part of the balance.
• Loan repayment under different terms could be required. In this case, you may receive a lower interest rate or a different monthly payment.

Some Education Loans Can Be Discharged in Bankruptcy

While it is true that it’s more difficult to discharge student loans, it can be done. Using the hardship test and an adversary proceeding, student loans can be addressed during bankruptcy. Many borrowers don’t realize those steps are available.

An important thing to note is that “private student loans” aren’t subject to the extra steps. Those steps are for federal student loan borrowers. Some private loans for educational purposes can be treated like other consumer debts and discharged through normal bankruptcy proceedings.

Several types of loans meant for educational expenses are dischargeable without following the extra step, including the following:

• A loan in which the loan amount is more than the cost of attendance. These loans are typically paid directly to the consumer.
• A loan that was used to pay for education at institutions that aren’t eligible for Title IV funding. This can be an unaccredited college, an unaccredited training or trade certificate program, or a school in a foreign country.
• A loan that was used to cover living expenses or fees that are incurred when studying for professional exams, such as the bar exam.
• A loan that was used to cover moving costs, living expenses, or fees associated with participation in a medical or dental residency.
• A loan that was for someone who was attending school less than half-time.

Things to Consider If Student Loans Are Being Collected After Bankruptcy

If you have a private student loan, and that debt is still being collected after you’ve been through bankruptcy, there are some questions you should ask yourself. Those include the following:

• Did you take out a loan that only covered tuition, books, room, and board, or was your loaner more than the cost of attending school? It could have been discharged if your loan was more than the attendance costs.
• Was your loan used to pay for education at an unaccredited school, training, or trade facility or a school in a foreign country? If it was, then that loan may have been discharged in your bankruptcy.
• Was your loan used for expenses associated with a professional exam? Or did it cover the costs of moving, living expenses, or other fees related to a medical or dental residency? Your loan may have been discharged if so.
• Were you attending school less than half-time when you obtained the loan? That loan may have been discharged.

If you’ve asked yourself these questions and think you may have been paying a loan that was discharged in your bankruptcy, there are some things you can do to find out if it was indeed discharged.

1. Document any bills you’ve received since filing bankruptcy and how much you’ve paid since that bankruptcy was discharged.
2. Find all the documents you have pertaining to the loan. Find everything from the promissory note and any communications from the loan originator or servicer. Also, locate any relevant bankruptcy documents that include that debt and the discharge order.
3. You can also file a complaint with the Consumer Financial Protection Bureau (CFPB). If you file a complaint, ensure that you attach any information about the loan that will support your complaint.

What If I Can’t Afford the Payments on My Loan That Wasn’t Discharged?

Many borrowers think they must adhere to the original terms of their loan even if they can’t afford the payments. However, there are multiple repayment plans available to borrowers. The first step is contacting your loan servicer and discussing your repayment plan with them.

Often, there are options available to you that you aren’t aware exist. You may qualify for a different repayment plan, a different interest rate, or some other helps that you didn’t know was available. To locate information regarding federal student loans or who services your loans, log in to “My Federal Student Aid.”

Get Prudent Legal Counsel from an Astute Bankruptcy Lawyer in Athens, GA

One way or the other, bankruptcy usually clears student loans. For a free consultation with an experienced Georgia bankruptcy lawyer, contact Morgan & Morgan, Attorneys at Law, P.C. at (706) 843-2905. We routinely handle matters in Clarke County and nearby jurisdictions.

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Original article revised on Jan 13, 2023