Student Loans and Oklahoma Bankruptcy

Discharging Student Loans and Oklahoma Bankruptcy

South Tulsa Bankruptcy Lawyers

Student loans are one of the largest sources of personal debt in the United States.  For many people who are exploring bankruptcy, student debt is a large portion, and in some cases, the majority of their debt.  Many potential bankruptcy debtors are unsure whether or not their student loans, federal or private, can be discharged.  Recent statements by the President and by the Department of Education concerning bankruptcy and student loans have further confused this situation.  It is important for potential debtors to have a clear understanding of what the laws and rules are concerning student loans and Oklahoma bankruptcy before filing, so as to have clear expectations for what their financial situation will be post bankruptcy.

First, it is critical to understand that regardless of Presidential memoranda or Department of Education guidelines, the basic law surrounding student loans in bankruptcy is unchanged since the bankruptcy reforms of 2005.  Specifically, 11 USC §523(a)(8) states that any education loan made, insured, or guaranteed by the federal government cannot be discharged, “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.”  After 2005, that law also applies to any student loan made by a private entity.  Thus, any and all student loans, federal or private, are subject to a “undue hardship” test when a debtor seeks to discharge them in bankruptcy.

The statue does not define what an “undue hardship” consists of, and the Supreme Court has yet to issue a ruling in a bankruptcy case on the issue.  Thus, it is left up to the Federal Circuit courts to determine what standard should be used for determining undue hardship.  The most commonly used test comes from a New York case from 1987, Brunner v. New York State Higher Education Services Corp., (831 F.2d 395, 2d Cir. 1987).  In Brunner, the Second Circuit determined that an undue hardship consists of three factors:

1. Inability to maintain a minimal standard of living if forced to repay the loan.


2. Additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and


3. Debtor has made good faith efforts to repay.

This test is, in and of itself, vague, particularly “additional circumstances” and “good faith efforts.”  Since the Brunner ruling in 1987, the courts have generally determined that “additional circumstances” is effectively equal to disability.  If a debtor is unable to work or earn a living due to illness or injury, and that condition is likely to be long term or permanent, then the “additional circumstances” test is met.  In such cases, “good faith efforts” have often been interpreted widely to mean any attempt to repay the loans, though the longer and more consistent loan repayment has been prior to bankruptcy, the better.  Some courts have suggested that other standards, such as a confluence of catastrophic events outside the debtor’s control (such as an unexpected divorce combined with illness of a child and loss of income) could constitute an “undue hardship”, particularly with past evidence of an intent to repay the loans, but until the Supreme Court rules on the issue, the Brunner test is still the most widely used.

Because student loans are presumed to be non-dischargeable, a debtor must file an adversarial proceeding with the bankruptcy court to have them considered.  The Department of Education has, in the past, frequently contested such proceedings in an attempt to prevent discharge.  A Presidential Memorandum from President Obama in March of 2015 ordered the Department of Education to clarify the circumstances under which they would continue to challenge such filings.  On July 7, 2015, the Department released a memo stating that they would limit their challenges to cases where they disagreed that an undue hardship existed, and further, not pursue cases when the costs to fight the adversarial proceeding in bankruptcy court would exceed one third of the total amount of the loan due.

While that sounds promising, it doesn’t actually represent any real change in the status of student loans and Oklahoma bankruptcy.  First, private loans aren’t covered by these guidelines at all, because the Department of Education has no control over them.  Second, while these guidelines are being publicly released for the first time due to the Presidential Memorandum, they are essentially how the Department of Education has operated for years.  None of these guidelines change federal law or particularly modify the Brunner test.

Therefore, for a non-disabled debtor, student loans, whether federal or private, are effectively exempt from discharge.  Disabled debtors have more options.  The Department of Education, in accordance with the guidelines it released on July 7, are issuing forgiveness for federal student loans if they determine that an undue hardship exists.  This loan forgiveness is technically outside the bankruptcy, but is often requested in conjunction with a bankruptcy filing.  If the Department of Education determines that an undue hardship does not exist, a disabled debtor could still file an adversarial proceeding to attempt to discharge the debts through the court, though, as suggested above the Department of Education will still contest those proceedings if it deems it to be in the financial interest of the government.  Private loans, even for disabled debtors, are still likely to be challenged in all cases, and few, if any, private lenders have a procedure or policy in place to forgive the debt for disabled debtors.

In conclusion, despite Presidential memos and government guidelines, the best rule of thumb is that student loans are not dischargeable.  If you have a disability and believe that you may qualify to have your loans forgiven or discharged, speak to your bankruptcy attorney regarding this matter.

Student loans are one of the largest sources of personal debt in the United States.  For many people who are exploring bankruptcy, student debt is a large portion, and in some cases, the majority of their debt.  Many potential bankruptcy debtors are unsure whether or not their student loans, federal or private, can be discharged.  Recent statements by the President and by the Department of Education concerning bankruptcy and student loans have further confused this situation.  It is important for potential debtors to have a clear understanding of what the laws and rules are concerning student loans before filing, so as to have clear expectations for what their financial situation will be post bankruptcy.

First, it is critical to understand that regardless of Presidential memoranda or Department of Education guidelines, the basic law surrounding student loans in bankruptcy is unchanged since the bankruptcy reforms of 2005.  Specifically, 11 USC §523(a)(8) states that any education loan made, insured, or guaranteed by the federal government cannot be discharged, “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.”  After 2005, that law also applies to any student loan made by a private entity.  Thus, any and all student loans, federal or private, are subject to a “undue hardship” test when a debtor seeks to discharge them in bankruptcy.

The statue does not define what an “undue hardship” consists of, and the Supreme Court has yet to issue a ruling in a bankruptcy case on the issue.  Thus, it is left up to the Federal Circuit courts to determine what standard should be used for determining undue hardship.  The most commonly used test comes from a New York case from 1987, Brunner v. New York State Higher Education Services Corp., (831 F.2d 395, 2d Cir. 1987).  In Brunner, the Second Circuit determined that an undue hardship consists of three factors:

1. Inability to maintain a minimal standard of living if forced to repay the loan.


2. Additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and


3. Debtor has made good faith efforts to repay.

This test is, in and of itself, vague, particularly “additional circumstances” and “good faith efforts.”  Since the Brunner ruling in 1987, the courts have generally determined that “additional circumstances” is effectively equal to disability.  If a debtor is unable to work or earn a living due to illness or injury, and that condition is likely to be long term or permanent, then the “additional circumstances” test is met.  In such cases, “good faith efforts” have often been interpreted widely to mean any attempt to repay the loans, though the longer and more consistent loan repayment has been prior to bankruptcy, the better.  Some courts have suggested that other standards, such as a confluence of catastrophic events outside the debtor’s control (such as an unexpected divorce combined with illness of a child and loss of income) could constitute an “undue hardship”, particularly with past evidence of an intent to repay the loans, but until the Supreme Court rules on the issue, the Brunner test is still the most widely used.

Because student loans are presumed to be non-dischargeable, a debtor must file an adversarial proceeding with the bankruptcy court to have them considered.  The Department of Education has, in the past, frequently contested such proceedings in an attempt to prevent discharge.  A Presidential Memorandum from President Obama in March of 2015 ordered the Department of Education to clarify the circumstances under which they would continue to challenge such filings.  On July 7, 2015, the Department released a memo stating that they would limit their challenges to cases where they disagreed that an undue hardship existed, and further, not pursue cases when the costs to fight the adversarial proceeding in bankruptcy court would exceed one third of the total amount of the loan due.

While that sounds promising, it doesn’t actually represent any real change in the status of student loans.  First, private loans aren’t covered by these guidelines at all, because the Department of Education has no control over them.  Second, while these guidelines are being publicly released for the first time due to the Presidential Memorandum, they are essentially how the Department of Education has operated for years.  None of these guidelines change federal law or particularly modify the Brunner test.

Therefore, for a non-disabled debtor, student loans, whether federal or private, are effectively exempt from discharge.  Disabled debtors have more options.  The Department of Education, in accordance with the guidelines it released on July 7, are issuing forgiveness for federal student loans if they determine that an undue hardship exists.  This loan forgiveness is technically outside the bankruptcy, but is often requested in conjunction with a bankruptcy filing.  If the Department of Education determines that an undue hardship does not exist, a disabled debtor could still file an adversarial proceeding to attempt to discharge the debts through the court, though, as suggested above the Department of Education will still contest those proceedings if it deems it to be in the financial interest of the government.  Private loans, even for disabled debtors, are still likely to be challenged in all cases, and few, if any, private lenders have a procedure or policy in place to forgive the debt for disabled debtors.

In conclusion, despite Presidential memos and government guidelines, the best rule of thumb is that student loans are not dischargeable.  If you have a disability and believe that you may qualify to have your loans forgiven or discharged, speak to your bankruptcy attorney regarding this matter.

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Student Loans and Oklahoma Bankruptcy

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