Bankruptcy Courts Split on Whether Not Applying for Income-Based Repayment Bars Discharge of Student Loans
When discussing student loans in bankruptcy, the media usually couch them in terms like “difficult to erase” in bankruptcy. The reason they say this is that student loan debtors must pass an “undue hardship” test, which isn’t defined in the Bankruptcy Code because it originally existed with a five-year or seven-year time limit after which the loans were freely dischargeable. Without the time limit, the importance of the definition of “undue hardship” increases substantially. In Nevada, we use what’s called the Brunner test, named for the case in which it was first defined. To pass it and obtain a discharge, the debtor must show three things:
- She cannot maintain a minimal standard of living for herself or her dependents if forced to repay the loan,
- Circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period, and
- The debtor has made a good faith effort to repay the loan.
The third prong, the “good faith” requirement, is receiving more scrutiny because as the government has become more aware of the possibility of debtors being unable to repay their student loans, and so it created the Income-Based Repayment (IBR) program in 2008. IBR is applies to all federal loans, unlike another program Income-Contingent Repayment (ICR), which only works for people in public interest positions. Although it’s unavailable for private loans, people with federally guaranteed loans or direct loans can go on IBR and spare themselves the agony of being forced to default on a debt they cannot discharge. IBR does, however, raise the question: Can a debtor pass the “good faith” prong of the Brunner test without applying for IBR. Bankruptcy courts in federal circuits that use the Brunner test are split, according to research published on the American Bankruptcy Institute Law Review [http://stjohns.abiworld.org/node/163].
- Last year in Illinois, a bankruptcy court determined that not applying for IBR did not prevent the debtor from passing the Brunner test because there was little chance she’d ever earn the income to repay the loan anyway.
- In one 2006 case in New York, a debtor was denied an “undue hardship” discharge because she did not apply for ICR.
- The article cites other cases, but it’s unclear if IBR or ICR was a factor.
Although it’s a wise idea to apply for IBR if it’s available and you’re having trouble making student loan payments, it might not be necessary.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.