Student Loan Bankruptcy Discharge or Student Loan Forgiveness


Some former ITT Tech students are refusing to pay their student loans after the for-profit college’s abrupt closure just as fall classes got underway.

The Carmel, Indiana-based company released a statement earlier in September which announced that the school’s 130 campuses nationwide – including one in Little Rock – would immediately cease operations. The move occurred in the wake of a Department of Education announcement that the government would no longer provide student financial assistance, which effectively ended ITT Tech’s ability to recruit and retain students. Shortly thereafter, an organization announced a student debt repayment strike, citing the government’s failure to protect students from “ITT’s scam.” Several students posted angry comments on The Debt Collective’s website. One said that he owed “around $70,000 that I will never be able to repay.”

The Debt Collective organized a related effort when for-profit Corinthian College ceased operation under similar circumstances last year.

Non-Bankruptcy Options for Student Loan Forgiveness

Sometimes (although not very often) there are non-bankruptcy debt relief options available, and an experienced bankruptcy attorney can review them with you during your initial consultation. With regard to the ITT Tech fiasco, there are two federal programs that may help former students. The borrower defense program may forgive student loans if the school committed certain kinds of fraud. In this case, the federal government has already determined that ITT Tech defrauded students, but whether or not this activity results in loan forgiveness is a separate proceeding. Current and former students may be eligible for such a discharge.

The closed school discharge might apply as well, especially to current students. As the name implies, if the institution suddenly closes either while the borrower is attending classes or within 120 days of withdrawal.

Student Loan Bankruptcy Discharge Options

The first Bankruptcy Act of 1898 classified student loans as any other unsecured debt, meaning that they were dischargeable. The law remained essentially unchanged, aside from a few minor modifications, for about seventy-five years.

In the mid-1970s, Congress began considering substantial revisions to the Bankruptcy Code, and some lawmakers determined that the student loan rules should be changed. There was a prevailing attitude among many conservatives that 1960s student radicals borrowed money to attend school not to earn a degree, but to stir up dissension against the Vietnam War and promote other left-wing causes. Not surprisingly, many liberals dismissed this prejudice as pure silliness. In the end, the 1978 Bankruptcy Code contained a compromise provision regarding student loans. From that point forward, these loans could be discharged in bankruptcy only after a showing of “undue hardship,” a phrase which the law did not really define.

Later Developments

This provision got its first real test in Brunner v. New York State Higher Education Services Corporation (1982). Marie Brunner graduated with a master’s degree in social work with about $9,000 in debt. Even at the time, that was not an insurmountable amount of money, especially considering that Ms. Brunner would have paid the balance over about twenty years or so. She presented no evidence that she could not find a job or that the payments would be a hardship. Moreover, the court seemed clearly irked that she asked for a bankruptcy discharge only ten months after graduation, had not made a single payment, and did not request a deferral or other relief prior to filing.

Given all these facts, the Second Circuit Court of Appeals developed a three-prong test that became known as the Brunner Rule. In order to discharge student loans in bankruptcy, debtors must establish an “undue hardship,” and the elements are that the debtor:

  • Cannot maintain a “minimal” standard of living if s/he attempts to repay the loans,
  • Faces a permanent or long-term hardship, and
  • Made a good faith effort to repay the debt.

Some critics immediately questioned the Brunner Rule because of its obvious harshness and because the elements are mutually exclusive (it is almost impossible to demonstrate both a good payment history and a crippling economic hardship). Under the Brunner rule, it is difficult – although not impossible – to discharge student loans in bankruptcy based on anything short of a medical disability.

New Developments

Brunner was a case from the Second Circuit Court of Appeals in New York, which means it never was binding law in the Eighth Circuit, which is based in St. Louis and includes Arkansas. As a matter of fact, the Eighth Circuit expressly rejected the Brunner Rule in favor of a totality-of-the-circumstances test in Walker v. Sallie Mae (2009).

Remember the facts in Brunner. . .the ex-student who never made any effort to repay her somewhat modest loans and did not appear to be in financial distress. The facts in Walker were completely different, which partially explains the different result. Michelle Walker was a former medical school student who had been unable to graduate, and left school with a staggering $300,000 in student debt. She worked for a while as a counselor and a substitute teacher, and eventually became a stay-at-home mom to disabled twins while her husband worked as a police officer. The monthly student debt payment would not have sent the family to the proverbial poorhouse, but it would have forced them to live a significantly lower lifestyle.

Under the Brunner Rule, Ms. Walker is experiencing unfortunate circumstances but there is no “hardship” in the legal sense of the word. But the Eighth Circuit used a totality-of-the-circumstances analysis and granted Ms. Walker a discharge. Some circuits still use the Brunner Rule, so this question may ultimately go before the Supreme Court.

To take advantage of the new student loan discharge rules in Arkansas, contact an experienced Little Rock bankruptcy attorney from Niblock & Associates. Convenient payment plans are available.

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