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Cases could impact student loan discharge in Chapter 7 bankruptcy

Most Ohio residents are aware that it is very difficult to have one's student loan debt eliminated through a personal bankruptcy case. This is due to the strict approach taken by the nation's bankruptcy courts, which requires a borrower to clear a very difficult hurdle in order to have student loan debt discharged by a Chapter 7 bankruptcy case. Currently, however, there are two important cases making their way through the court system, either of which could prove to be a game-changer in how student loan debt is handled in bankruptcy.

The last time a standard for assessing student loan debt during bankruptcy proceedings was created was in 2005. Currently, filers in most parts of the country are assessed based on what is known as the Brunner test. This standard requires a borrower to prove that he or she cannot meet a minimal standard of living while also making student loan payments. The filer must also prove that his or her financial circumstances are not likely to improve and that good-faith efforts have been made to repay the loans.

A less stringent test is used by the U.S. Court of Appeals for the 8th Circuit and is known as the totality of circumstances test. This approach looks at a number of factors when determining if an individual's circumstances rise to the level of undue hardship. Many believe that this is a less rigid and more holistic approach to considering whether a person's student loans should be discharged during bankruptcy.

As the current cases move forward, changes may be on the horizon when it comes to student loan debt and Chapter 7 bankruptcy. Currently, it is estimated that only one out of every 300 filers asks the court to include his or her student loan debt in the discharge process. If the current cases suggest a loosening of standards, the current stance could change, making it easier for borrowers in Ohio and elsewhere to find much-needed relief.

Source:, "Why student loan borrowers should pay attention to these two court cases", Jillian Berman, Oct. 21, 2015

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