Discharge in Bankruptcy

Student loans are not usually discharged in bankruptcy. It is difficult, but not impossible, to do so if you can show that payment of the debt “will impose an undue hardship on you and your dependents.” It is usually necessary to file an adversary proceeding against the student lenders in the bankruptcy proceeding in order to give the court the opportunity to determine the dischargeability of the student loan.

Most courts use what is called the ”Brunner” test:

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This test is based on a twenty-year old U.S. Court of Appeals decision (Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987]) it requires a debtor to prove three factors apply to their case:

  1. That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and dependents if forced to pay off student loans;
  2. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  3. That the debtor has made good faith efforts to repay the loans. The Brunner test is used by the Oregon bankruptcy courts to determine if a student loan can be discharged.

If you can successfully prove the three factors of the Brunner test, your student loan will be discharged and you will never have to pay it. However, even if you cannot prove undue hardship as defined by In re Brunner, filing a petition for bankruptcy relief automatically protects you from collection actions on all of your debts, including all student loans, at least until the bankruptcy case is resolved.

Even if it is not possible to show undue hardship that conforms to the Brunner standard, the Oregon courts have been flexible in allowing half measures. In some circumstances, Oregon bankruptcy judges have permitted the discharge of a portion of the loan, modification of its terms, or if there are multiple loans the court has discharged some loans that required high payments and left loans with flexible repayment terms in place.

Non-Bankruptcy Discharge of Student Loans

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