US Department of Education issues advisory letter on student loans and bankruptcy!

If you know anything about bankruptcy and student loans, you know that they do not work well together.  Student loans are not dischargeable in either a Chapter 7 or Chapter 13 Bankruptcy unless you file an adversary proceeding and can show that the loans present an undue hardship on the Debtor.  The test called the "Brunner Test" is very difficult to pass unless a Debtor has a severe illness and no prospect of ever repaying the debts again.

The US Department of Education issued a letter today providing guidance to lenders when dealing with student loan discharge claims.  The letter reiterates how only a Debtor in an extreme situation should be issued a discharge of their student loans in bankruptcy.  Although the letter does direct student loan lenders to follow a two-step analysis to determine whether they should object to an attempt at discharging student loans in a bankruptcy case, the result is essentially the same: Student loans are extremely difficult to discharge in bankruptcy.

The two-step analysis suggested by the US Department of Education is as follows:

1. First a loan holder must evaluate a borrower's undue hardship claim and determine whether the holder believes the repayment would constitute an undue hardship according to the legal standard set by the Federal Courts.  (Essentially the Brunner test).  If the loan holder determines that there would be an undue hardship, they can consent and not oppose the discharge.  (Although they could still object at this point).

If the loan holder believes there is no undue hardship they then move on to step 2.

2. The loan holder should then weigh the cost of objecting to the undue hardship claim in court, with consenting to the discharge.

Long story short, this letter provides an analysis of student loan debt dischargeability and provides some guidance to lenders on how to approach adversary proceedings, but the takeaway is the same: Student loans are VERY difficult to discharge in bankruptcy.

It is also important to note that an adversary proceeding is often times a lengthy and expensive proceeding, and many Debtor can not afford to hire their bankruptcy attorney to litigate these matters.

The entire letter issued by the US Department of Education can be found here.