Maryland Bankruptcy Laws: Discharge a Student Loan

Increasing tuition costs causes student borrowing to rise.  Two-thirds of college students borrow to pay for college and according to the U.S. Department of Education federal student loan disbursements are steadily increasing each year.  In the 2008-2009 academic year the total amount that students borrowed and schools received grew to $75.1 billion.

Heavy debt from student loans is a growing concern among young American graduates with some students borrowing an amount equivalent to a home mortgage.  A report by the Institute for College Access & Success Project on Student Loan Debt showed that students who graduated in 2012 had an average of $27,000 in student loan debt.  Analysts expect this figure to rise substantially over the next 20 years.

What makes matters worse is that employment prospects are slim for recent graduates entering the workforce. Not only has the weak job market disproportionately hurt recent graduates, but also they are among the first employees to be let go during layoffs or downsizing.

Increasing student loan debt coupled with a struggling economy and unemployment at nearly 50% for this demographic, has created a generation that is struggling to stay afloat fiscally, much less achieve financial independence.

For these reasons many students consider filing for bankruptcy to discharge their student loan debt.

Under § 523 (a)(8) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, students can no longer file for bankruptcy for private or federal college student loan debt “unless such debt would impose an undue hardship on the debtor and the debtor’s dependents.”

Even so, it is rare that a judge will discharge a student loan under “undue hardship”. It is usually only when the debtor faces an unforeseen and permanent disability that prevents them from working, or prevents them from working at the level of pay necessary to pay off their student loan, that the judge grants student loan discharge.

In order file for bankruptcy in Maryland and discharge student loan debt under undue hardship, one must file a separate motion with the Bankruptcy Court in Maryland (link to and then appear before a bankruptcy judge to explain their situation.

The bankruptcy Court uses different tests to determine whether a particular borrower qualifies for discharge under undue hardship. One such test is the Brunner test which is based off the 1983 court ruling Brunner v. New York State Higher Education Services Corporation.  However, not all bankruptcy courts rely on the Brunner test.

Bankruptcy courts exercise flexibility with these terms; but in most bankruptcy cases the debtor has to show that:

  1. Repaying the student loan will cause undue hardship for themselves and their dependents to the extent that they cannot maintain a minimal standard of living
  2. Their current situation and the state of their financial affairs are likely to continue to cause undue hardship for a significant portion of the repayment period of the student loan
  3. They have made good faith efforts to repay their student loan but in doing so have become fiscally insolvent

There have been several instances where the courts have granted discharge to those seeking bankruptcy due to student loan debt, especially to those trapped in a cycle of poverty or have reached their maximum earning capacity and are still unable to support themselves or their family.

Bankruptcy courts take all mitigating and aggravating factors into account when deciding whether or not to discharge a debtor’s student loan debt and they are not always sympathetic to borrowers who work in low-paying careers.  It is likely the court will deny discharge if it is possible for the debtor to find work in a higher paying field.

Individuals who are struggling to make their student loan payments should consider all of their options, such as economic hardship deferment or an extended-payment option, before turning to bankruptcy.  Some borrowers may qualify for the Student Loan Forgiveness Act.

Bankruptcy courts are generally reluctant to discharge student loan debt, so it is important to consult with a bankruptcy lawyer or financial consultant to understand other pros and cons associated with bankruptcy before incurring court costs.  Additionally, bankruptcy can leave a negative mark on your credit history for many years.

The bankruptcy lawyers of The Law Office of Jeffrey R. Scholnick have decades of experience in helping clients file for bankruptcy in Maryland and can offer experienced and trustworthy legal counsel as to whether or not to pursue a discharge of student loan debt.