- The BAPCPA Bankruptcy Code Reform Act
- The Bankruptcy Code and Non-Dischargeable Student Loan Debts
- The Brunner Test in the Sixth Circuit
- The Bankruptcy Student Loan Discharge Process
- Tips for Increasing Your Chances of Success of Student Loan Discharge
- Chapter 13 Student Loan Management
- What’s New & Hopeful in 2022 and beyond for Student Loan Bankruptcy Discharge?
- Student Loan Bankruptcy Discharge: The Bottom Line
Discharging student loans in Michigan bankruptcy is one of the most confusing and frustrating subjects that we discuss with potential clients.
This is because it is both true and also not true that you cannot discharge student loans in bankruptcy.
What do we mean by that?
What we mean is that, for most Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients, discharging student loans is unlikely to happen. On the other hand, “most” is not “all.” There are circumstances and cases which can result the discharge of student loan debt in bankruptcy.
This Article will explain the basic difficulties regarding student loan debt discharge in bankruptcy, as well as the circumstances in which it may be possible.
We will also discuss the extent to which Chapter 13 bankruptcy may still be useful in managing even non-dischargeable student loan debt.
But, first, why is it so hard to discharge student loans in bankruptcy?
The BAPCPA Bankruptcy Code Reform Act
Bankruptcy is a Federal legal process. It is not a function of Michigan state law. It functions pursuant to the rules outlined in a Federal statute called the US Bankruptcy Code (“the Code”).
The Code in its current form was enacted by Congress in 1978. It has been amended on a number of occasions. The most recent large-scale amendment was the so-called BAPCPA “Bankruptcy Reform Act” enacted in 2005.
In the original, 1978 version of the Code, student loans were just as dischargeable in bankruptcy as any other commercial debt. (And don’t be fooled by finance industry propagandists: student loans are simply commercial debt like any other.)
BAPCPA and the prior couple of Code amendments greatly altered the dischargeability of student loans in bankruptcy.
A debt of any sort is non-dischargeable in bankruptcy only if the Code says that this is so. Michigan state law doesn’t have anything to do with it. It is entirely “preempted” by Federal law (via the Code) in this way.
Neither does your promissory note, loan application, rental lease, mortgage agreement, or any other paper containing terms and conditions of your promise to repay money loaned to you.
So what does the Code say about student loan debt discharge?
The Bankruptcy Code and Non-Dischargeable Student Loan Debts
Section 528 of the Bankruptcy Code details the specific types of debts that are not dischargeable in bankruptcy.
Until the Code was amended from its original form, student loan debts were not listed in Section 528 at all. The Code was then amended to include government subsidized student loans among the non-dischargeable debts. Then, in BAPCPA, amended again to include all student loans, including private student loans.
Why? Was there really a big problem with rich doctors running straight from medical school to bankruptcy court?
There was not. What there was, however, was a strong lobbying push by Sallie Mae and other student loan debt servicers in Congress. In other words, palms were greased, and a law was passed that made life worse for everybody except student loan servicers.
What Section 528 of the Code now reads is that student loan debt (of any sort) is non-dischargeable unless repayment “would impose an undue hardship on the debtor and the debtor’s dependents.”
Did Congress go so far, however, as to also include in the Code a definition of “undue hardship?”
It did not. It left that definition to the Courts.
Well-heeled, well-paid Federal judges naturally remembered where they came from when figuring it out.
The Brunner Test in the Sixth Circuit
In 1987, well before BAPCPA swept private and all other student loans into Section 528, the 9th Circuit Court of Appeals in California issued a decision denying the discharge of student loan debt owed by a woman named Marie Brunner.
The definition of “undue hardship” that this Court elaborated in that case has since come to be relied upon and utilized by nearly all bankruptcy courts in the United States.
What is it? The so-called “Brunner Test” is a 3-prong test for “undue hardship” in any given Chapter 7 or Chapter 13 bankruptcy case.
Although Brunner was a Ninth Circuit Case, the Sixth Circuit Court of Appeals, which includes Michigan in its jurisdiction, has wholeheartedly adopted its test.
The Sixth Circuit has echoed the Brunner Test as follows:
Repayment of student loan debt imposes an “undue hardship” if the debtor shows—
- that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
- that 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
- that the debtor has made good faith efforts to repay the loans.
Further, the Sixth Circuit requires, in demonstration of “good faith efforts,” that you have attempted to take advantage of all income-based repayment plan, deferment, and forbearance options prior to the filing of your bankruptcy case.
It sounds reasonable, right? Not too bad?
You’d be wrong if you thought that. Like most judge-manufactured “tests,” the Brunner Test is simply a smokescreen for whatever subjective determination the judge (or panel of judges) is inclined to make.
The Sixth Circuit has little to no history of actually finding that a debtor in bankruptcy is suffering from any qualifying undue hardship.
Worse, to even get to the point of being denied discharge of your student loan debt in Michigan bankruptcy, you need to spend a lot of money first.
The Bankruptcy Student Loan Discharge Process
For any debt not listed in Section 528 of the Bankruptcy Code, the debt is simply discharged once you successfully conclude a Chapter 7 or Chapter 13 bankruptcy case.
You don’t have to do anything other than prosecute your bankruptcy case.
For debts that are listed in Section 528, you must do some extra work to have them discharged. At extra expense in the form of attorney’s fees and bankruptcy court filing fees.
Namely, after filing your Chapter 7 or Chapter 13 bankruptcy case, you must then file an “adversary proceeding” against your student loan creditors.
That is, you must file a lawsuit against them within your own bankruptcy case. The outcome of such a lawsuit, if successful, is not a money judgment but, rather, an order from your bankruptcy judge agreeing that your student loan may be discharged.
Should such a decision be rendered, however, you can count on your student loan servicer appealing it to—yep, you guessed it: the Sixth Circuit.
Click here to read an article I wrote regarding my perspective as a consumer bankruptcy attorney who represents debtors in bankruptcy case on the Dischargeability of Student Loans in Bankruptcy cases.
Tips for Increasing Your Chances of Success of Student Loan Discharge
Then again, you will never know if your student loan debt may be discharged in bankruptcy if you don’t seek expert legal advice.
Student loan debt discharge does happen. There are, in fact, other arguments that may be brought in your adversary proceeding outside of the confines of the Brunner Test.
For example, the question of whether your debt arose from a qualified educational expense as required by the Code for non-dischargeability be brought. (Although, again, this is an argument that neither the judges of the Eastern District of Michigan Bankruptcy Court nor the Sixth Circuit have received warmly.)
Before meeting with a bankruptcy attorney to discuss your path to student loan discharge through bankruptcy litigation, you might increase your chances of success by:
- Gathering all relevant financial documents, including income documentation, expense documentation, tax returns;
- Gathering all documentation related to the student loan debt, including original loan applications and promissory notes, tuition invoices and receipts, expenditure receipts, applications or documentation related to forbearances and income-based repayment plans, and more;
- Providing all evidence of medical disability and Social Security Disability applications and awards.
A student loan dischargeability adversary proceeding will require an enormous amount of documentation and paper.
You can help your Michigan bankruptcy attorney help you by gathering it before you even schedule your first consultation appointment.
Chapter 13 Student Loan Management
So is all hope lost if your student loan debt is not dischargeable in bankruptcy or you cannot afford the litigation? (Most bankruptcy attorneys will charge hourly for such litigation on top of whatever you paid for the underlying Chapter 7 or Chapter 13 case filing.)
If you have regular, predictable, and sufficient income, a Chapter 13 bankruptcy filing automatically stays all collection activity—including that of non-dischargeable debt holders.
In a Chapter 13 bankruptcy, for 3-5 years, you pay what you can afford to pay to your creditors through a bankruptcy court-ordered and -supervised Chapter 13 payment plan. Your monthly payment is calculated from your net take-home pay (after necessary household expenses).
The Chapter 13 “reorganization” process allows you to pay priority debts, such as your mortgage or car payment, ahead of non-priority debt, such as credit cards, medical bills, or—student loan debt.
If a low priority debt is not fully repaid at the end of a Chapter 13, the balance owed is discharged in balance.
However, if the debt is not dischargeable, the remaining unpaid balance will remain collectible plus accrued interest and late fees.
Thus, a Chapter 13 bankruptcy may provide some shelter from student loan collections which can be useful in some cases. However, if you are making only a minimal monthly Chapter 13 plan payment is made, you may emerge from the Chapter 13 owing more in student loan debt than when you entered the process.
This option requires careful and expert analysis to determine its benefit relative to non-bankruptcy options.
What’s New & Hopeful in 2022 and beyond for Student Loan Bankruptcy Discharge?
As of this writing, in December, 2022, the headlines hint at some possibility for reform of the student loan bankruptcy discharge process.
Certain Senators and Congressional Representatives have submitted a number of bills restoring student loan dischargeability or offering other forms of student loan relief. However, none of these bills have moved forward very quickly or seem, generally, likely to succeed.
President Biden has forgiven up to $20,000 in student loan debt, but, naturally, Republican state officials have sued to stop this on the flimsiest of legal bases. The US Supreme Court will hear this case in February, 2023, on an expedited basis.
Likewise, President Biden has also extended the COVID repayment forbearance, although ongoing interest is not waived.
The US Department of Education has also issued new guidance attempting to simplify the process of discharging student loan debt through bankruptcy adversary proceedings. The new guidance attempts to identify evidence of “good faith” and other such factors.
However, in the end, this new guidance does not dislodge Brunner, and it still leaves the ultimate “yay or nay” decision in the highly subjective hands of individual Bankruptcy Court judges.
Student Loan Bankruptcy Discharge: The Bottom Line
The bottom line is that you need to consult an experienced Michigan bankruptcy attorney to determine whether you stand any chance of discharging your student loans. Further, only a highly experienced Detroit bankruptcy attorney will be able to analyze the cost-effectiveness of a Chapter 13 bankruptcy involving student loan debt.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully discharged the debt of thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you are struggling with unmanageable student loan debt, contact us now to schedule your free consultation.