Student Loan Cancellation Faces Major Setback Beállítások

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Student Loan Cancellation Faces Major Setback



Student loan cancellation just faced a major setback.

Here’s what you need to know — and what it means for your student loans.

Student Loans
Student loan cancellation hit a major speedbump, not in Congress or with the president, but in court. The U.S. Court of Appeals for the Second Circuit issued a ruling last month that could make it more difficult to discharge student loans in bankruptcy. While this may not impact one-time, wide-scale student loan cancellation, the ruling could impact any borrower that seeks to cancel student loans through the bankruptcy process.

Student loan cancellation: how to discharge student loans
Over the past several years, there have been several high profile student loan cancellation cases in bankruptcy. For example:

This man got $221,000 of student loans discharged in bankruptcy
A Navy veteran had $220,000 of his student loans discharged, even though he is not unemployable, not disabled or wasn’t defrauded. A U.S. bankruptcy judge in New York ruled that Kevin J. Rosenberg will not have to repay his student loan debt because it will impose an undue financial hardship.

This doctor got $430,000 of student loan cancellation in bankruptcy
Seth Koeut, a medical school graduate, got nearly 99% of his student loans cancelled through student loan discharge in U.S. Bankruptcy Court for the Southern District of California. Koeut, a graduate of Duke University and the for-profit Ponce School of Medicine in Puerto Rico, filed for Chapter 7 bankruptcy after not securing employment as a medical resident.

How did these student loan borrowers get student loan cancellation? Traditionally, unlike mortgages or credit card debt, student loans cannot be discharged in bankruptcy. There are exceptions, however, namely if a borrower can prove certain conditions regarding financial hardship.

Student loan cancellation: financial hardship
The Brunner test is the legal test in all federal circuit courts, except the 8th circuit and 1st circuit. The 8th circuit uses a totality of circumstances, which is similar to Brunner, while the 1st circuit has yet to declare a standard. There are differences across circuit courts, but that’s the basic framework.

The Brunner standard has three primary components:

the borrower has extenuating circumstances creating a hardship;
those circumstances are likely to continue for a term of the loan; and
the borrower has made good faith attempts to repay the loan.
If you can prove these three primary components, you may qualify for student loan cancellation in bankruptcy. Importantly, a student loan borrower does not have to make student loan payments, but has to attempt to make payments — such as trying to find a workable student loan payment plan. To discharge student loans through bankruptcy, an Adversary Proceeding (a lawsuit within bankruptcy court) must be filed, where a debtor claims that paying the student loan would create an undue hardship for the debtor.

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