Student Loan Discharge 2013 Updates

Student loans continue to be a heavy burden on many people.  Student loan payments are often as much as mortgage payments and can severely limit your ability to have any kind of financial future.  Unfortunately many people just assume that they cannot discharge their student loans in bankruptcy.  While it is true that it is difficult to discharge student loans in bankruptcy, it is not impossible.  Some recent decisions from courts in the Ninth Circuit give us some indication how to discharge student loans in bankruptcy.
The clear indication from the most recent run of cases is that discharging student debt requires preparation.  Unless you are living on the verge of homelessness, you cannot simply file a bankruptcy petition, file an adversary proceeding, and expect to get a student loan discharge.
The Evolving Law of Student Loan Discharge
The three elements of student loan discharge are called the Brunner Test and can be boiled down to: 1) how much do you earn, 2) could you earn more, and 3) have you tried to do something about your student loans.
The first part of the test and the third part of the test go together, because they are related to earning earnings and attempts at repayment.  Basically, the court will look at how much you make and how you spend your money.  If too much money is left over, then you are not entitled to a student loan discharge.  One court said that you have to “show more than tight finances” but you can stop short of “utter hopelessness,” however, you are not entitled to a “middle class standard of living” if you want to discharge student debt.”  ECMC v. Beattie, 490 B.R. 581, 586 (W.D.WA 2013).
The question, therefore, is whether your expenses are excessive in light of your obligation to repay your student loans.  Fortunately, the Ninth Circuit’s recent decision in Hedlund v. Educational Resources Institute, Inc. will help many more people qualify for a student loan discharge.
First, and most importantly, they separated the conduct of the husband – who was seeking a student loan discharge – from the conduct of his wife.  The court ruled that the wife’s decision not to work could not count against the husband’s good faith in proposing a budget and attempting to repay the student loans.  This provides some relief for borrowers, because it prevents the lender from pointing at the spouse’s conduct.  This doesn’t mean that if your spouse is a plastic surgeon, you can simply ignore their income and discharge your student loans.  It does, however, mean that the court must focus on the borrower.  In the past, lenders would ask why the borrower’s spouse couldn’t earn more.
The idea that the inquiry is narrowed may not seem significant to non-lawyers, but to lawyers it is huge.  The Brunner Test is a “totality of the circumstances test.”  The court examines each of the three prongs of the Brunner Test independently, but it must look at every fact and circumstance that arises under each prong.  If you fail to meet one prong, then the court will rule in favor of the student lender.  Narrowing the inquiry means that there are fewer facts and circumstances that go into the test.  This means that there is less opportunity for a student lender to use something against you.  The facts and circumstances no longer include the question “why can’t your spouse earn more.”
The interesting thing about this is that your spouse’s lack of work cannot hurt you anymore, but it can still help you.  For example, if your spouse decides to stay at home and take care of the kids or an elderly relative that does not mean you are acting in bad faith and cannot discharge your student loans.  However, if your spouse is unable to work or unable to increase their income, that can still help you.  You can still argue that your ability to repay your student loans is limited by your spouse’s inability to increase their income.
Second, the Ninth Circuit recognized that even though certain expenses might be “excessive” they could also be “marginal.”  In other words, a budget does not have to be perfect and it does not have to be cut down to the barest minimum in order for you to discharge your student loans.  In Hedlund, the Ninth Circuit noted that the cell phones and the car lease were probably excessive expenses, but they were also marginal.
The court reached this conclusion in part because the expenses were also necessary.  This highlights an area of struggle in student loan litigation.  Student lenders will argue that any expense beyond basic housing, food, clothing, and medical expenses is excessive.  This means that student lenders will object to things like car payments, cable, and internet.  It is absolutely absurd to argue that the internet is not part of a basic existence in 2013, but that’s their argument.  The Hedlund decision will hopefully limit their ability to make such absurd arguments by allowing a court to note that an expense may be excessive, but that the excess is marginal.
The middle prong of the Brunner Test – could you earn more – is usually the simplest prong to prove.  You have to prove that you have tried to get a better paying job; and that, a better paying job is unavailable.  A trickier question is whether you could get a second job; however, courts appear to be wary of forcing people to work more than fulltime.  If you are only working part time, then the court will expect you to either work a second job or explain why you cannot work a second job.  Given the state of the economy, this remains the easiest part of the test to satisfy.
Why Preparation Is Essential
The recent cases on student loan discharge have all focused on the borrower’s attempts to repay the loan before they filed bankruptcy.  There are two reasons for this.  First, the law treats bankruptcy as an absolute last resort for student loan borrowers.  Second, in the last few years student lenders have created many new forbearance and alternative repayment options.
Since bankruptcy is the absolute last resort for discharging student debt, it is important to show that it is your last resort.  This means that before you file bankruptcy, you should work with a bankruptcy attorney to put your case in the best possible light.  This means reviewing your employment history, reviewing your spending, and documenting your efforts to maximize income and reduce expenses.  Documentation is your best friend when you file an adversary proceeding to discharge a student loan.  If you can actually show what you spent your money on for the last six months to a year, and it was only spent on necessities, then you have a much stronger case.  Additionally if you can show that you have actively tried to seek higher paying work and been unsuccessful, then you have a much stronger case.
At the same time that you are documenting your income and expenses, you should apply for all consolidation, forbearance, and alternative repayment plans that are available to you.  You will quickly realize that your federally backed student loans are much quicker to help you out than your private student loans.  That’s fine.  Although there is no definitive ruling on the subject, it appears that courts are willing to give debtor’s credit for acting in good faith if they work out alternative repayment plans on federal loans; and then, attempt to discharge private loans that are either unwilling to reach alternative payment plans or their alternative payments plans are unreasonable.
One note of caution about applying for forbearance or alternative repayment plans, beware of lenders who “lose” your application.  Avoid online applications, because they are often impossible to trace.  Whenever possible, mail in your application using registered mail and keep the mailing receipt.  If it is impossible to submit the application through the mail, then make sure that you print out any confirmation of filing and make sure to contact customer service for confirmation that they have received your application materials.  You should keep all correspondence.
Conclusion
It is possible to discharge student loans in bankruptcy, but you should not expect to do it overnight.  You should work with a bankruptcy attorney who can help you setup your case to get the best possible result.  You may be able to resolve your student loan problems without resorting to bankruptcy.  A bankruptcy attorney, who is experienced in student loan issues, can help you find non-bankruptcy options for your student loans.  If you cannot find non-bankruptcy options for your student loans, then your bankruptcy attorney can help you create the paper trail necessary to make a good case for student loan discharge.
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