You may have heard that there are changes to the Bankruptcy code that now allows student loans to be discharged.  It's a little more complicated than that.  This article will explain how the law has changed - and also how it has not changed.

Under the current bankrutpcy code, student loans are all dischargeable, but only if you file a separate lawsuit in the bankruptcy court called an "adversary action".  You would have to sue the student loan lender and the bankrupty court would make a determination as to whether or not your loans should be discharged using what has been called the "Undue Harship" test or "Brunner" test.  The name Brunner comes from the bankruptcy case - In re: Brunner - where this rule was promulgated. 

The Undue Hardship test has three parts:

1.  You have to show that your current income and expenses prevent you from maintaining a minimal standard of living if you are forced to repay the student loan.

2.  Your financial situation is likely to persist for a significant part of the repayment period - which requires the judge to look into your future.

3.  You made a good-faith effort to pay the loan by trying to increase your income and minimize your expenses. So if you have a lot of defaulted payments, you may not be able to meet this part of the test.

The Undue Harship test STILL applies to both federtal student loans and private student loans. The changes we are going to discuss apply ONLY to federal student loans and they are simply guidelines for how the goverment should look at the Undue Harship test parts.

Federal Student Loans:

It is important to understand that the bankruptcy code has not been modified. The undue hardship test STILL applies. This is a change that the Biden administration has made to the Department of Justice and Department of Education (remember DOJ is the law firm for the goverment; they don't just do criminal cases) giving them guidence on whether the goverment should object to an adversary action trying to discharge a federal student loan.  To make this more complicated not all federal loans are included.  The bottom line is that now the federal goverment has encouraged the Department of Education and DOJ to not contest an adversary action if the Debtor can meet the new guidelines.  These changes are not arguments that can be made to a judge; this is you trying to convince the goverment to not fight back when you ask to discharge your student loans or to settle and agree that your federal student loans should be discharged.

You still have to file bankruptcy.  There is no way to know ahead of time if your loans will be discharged and you can't undo your bankruptcy if your loans do not get discharged.

Here are the guidelines:  DOJ Guidelines

Part one of the Undue Harship test is whether or not you can maintain a minimum standard of living if you are forced to repay the student loan.  The loan payment used is the REGULAR loan payment; not your income contingent payment.  The test used is very similar to the Means Test, but it is not the Means Test.  It is the same test the IRS uses if you owe them a lot of back taxes. 

Obviously, the lower your income, or the higher your student loan payment, your chances of getting your federal student loans discharged are higher.

Part two of the Undue Harship test - that your situation will stay the same in the future - now has some concreate guidance as to whether or not your circumstances will continue into the future.

Part three of the Undue Harship test - the guidelines have concreate guidance for this and speciifcally state the attorneys should not impose their own values on whether or not someone has acted in good faith.

We can help you determine if your student loans are federal.

How much does it cost to file an adversary action?

It is hoped that these new guidelines will prevent the pre-trial madness that occurs when a discharge action is brought.  So normally after the adversary action is filed, the goverment will engage in Discovery - depositions and interrogatories etc - all things that add to the cost of filing the action.  This allows us to file the action and then submit the appliction to the goverment to see if we can get the goverment on board.  Filing an adversary action is NOT part of the regular bankruptcy fee.  We can review your situation and give you an idea as to the cost once we review all of your bankruptcy paperwork. Remember, you must file bankruptcy to get this relief and the regular costs for bankruptcy are in addition to the cost to file the adversary action.


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The Fine Print

This is a law firm after all: This web site is for informational purposes only and does not create an attorney/client relationship. The law changes often, so please be sure to contact us for questions about your specific situation. You should NOT be making decisions about your financial life based only on the information on this web site or any web site. Seriously - don't do it. The law is complicated and is always in flux. This site is intended only for people who have legal matters in the Commonwealth of Pennsylvania. Pennsylvania has adopted the Federal Bankruptcy Exemptions, but not all states have done so. Be sure to contact a licensed attorney in your state, to learn about your state's bankruptcy procedure.

We are a DEBT RELIEF AGENCY under the United States Bankruptcy Code.

Dawn Cutaia, Esquire has been a licensed attorney in the Commonwealth of Pennsylvania since 1996, currently limiting her practice to bankruptcy, foreclosure and civil defense, and pardons.  Suzanne Smith, has been an attorney licensed in the Commonwealth of Pennslyvania since 1992, currently limiting her practice to criminal defense, pardons/expungements, and bankruptcy.  Dawn Cutaia is the sole member of Fresh Start Law, PLLC, a professional limited liability corporation in the Commonwealth of Pennsylvania.