Loans Online – Student loan Cancellation Faces Major Setback
Student loan cancellation just faced a major setback.
Here’s what you need to know — and what it means for your student loans.
Student loan cancellation hit a major speedbump, not in Congress or with the president, but in court. The U.S. Court of Appeals for the Second Circuit issued a ruling last month that could make it more difficult to discharge student loans in bankruptcy. While this may not impact one-time, wide-scale student loan cancellation, the ruling could impact any borrower that seeks to cancel student loans through the bankruptcy process.
Student loan cancellation: how to discharge student loans
Over the past several years, there have been several high profile student loan cancellation cases in bankruptcy. For example:
This man got $221,000 of student loans discharged in bankruptcy
A Navy veteran had $220,000 of his student loans discharged, even though he is not unemployable, not disabled or wasn’t defrauded. A U.S. bankruptcy judge in New York ruled that Kevin J. Rosenberg will not have to repay his student loan debt because it will impose an undue financial hardship.
This doctor got $430,000 of student loan cancellation in bankruptcy
Seth Koeut, a medical school graduate, got nearly 99% of his student loans cancelled through student loan discharge in U.S. Bankruptcy Court for the Southern District of California. Koeut, a graduate of Duke University and the for-profit Ponce School of Medicine in Puerto Rico, filed for Chapter 7 bankruptcy after not securing employment as a medical resident.
How did these student loan borrowers get student loan cancellation? Traditionally, unlike mortgages or credit card debt, student loans cannot be discharged in bankruptcy. There are exceptions, however, namely if a borrower can prove certain conditions regarding financial hardship.
Student loan cancellation: financial hardship
The Brunner test is the legal test in all federal circuit courts, except the 8th circuit and 1st circuit. The 8th circuit uses a totality of circumstances, which is similar to Brunner, while the 1st circuit has yet to declare a standard. There are differences across circuit courts, but that’s the basic framework.
The Brunner standard has three primary components:
- the borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the loan; and
- the borrower has made good faith attempts to repay the loan.
If you can prove these three primary components, you may qualify for student loan cancellation in bankruptcy. Importantly, a student loan borrower does not have to make student loan payments, but has to attempt to make payments — such as trying to find a workable student loan payment plan. To discharge student loans through bankruptcy, an Adversary Proceeding (a lawsuit within bankruptcy court) must be filed, where a debtor claims that paying the student loan would create an undue hardship for the debtor.
Student loan forgiveness: major setback
In recent years, some legal observers have noted a new trend that courts have begun to soften the Brunner standard, thereby making it potentially easier for student loan borrowers to get student loan cancellation. Last month, the Second Circuit issued a ruling in Tingling, a case which gave the circuit that created the Brunner standard, an opportunity to either reassert the high burden for student loan cancellation or potentially loosen the standards. The latter could result in an increase in potential filings to discharge student loans, while the former could limit student loan borrowers from seeking student loan cancellation through bankruptcy. The Second Circuit chose the former approach, thereby affirming the high burden to discharge student loans in bankruptcy. With this ruling, although the decision is not binding on other circuit courts, the Second Circuit is signaling to future litigants and courts that the Brunner test is a reasonable test, even if the burden is high, and that courts should not be flexible in its application. This is a potential blow to student loan borrowers who have been hoping for a potential weakening of the Brunner standard.
Student loan cancellation: next steps
While this court ruling is a major setback for student loan forgiveness, the good news is that Congress can act to impact student loan cancellation. For example, Congress can amend the U.S. Bankruptcy Code to allow student loans to be discharged in bankruptcy. This proposal has bipartisan support, including from President Joe Biden, Sen. Bernie Sanders and Sen. Elizabeth Warren (D-MA), among others. It’s possible that Congress acts to make it easier to cancel student loans in bankruptcy during this or the next congressional term. At the same time, Congress can still pass legislation on wide-scale student loan cancellation, although currently appears Democrats don’t have enough votes. As such, congressional Democrats are pressuring Biden to enact student loan cancellation by executive order. Biden has asked the U.S. Department of Education to conduct a legal review of his authority to enact student loan forgiveness by executive order unilaterally without further authorization from Congress. Biden wants to cancel student loans 3 ways. There are also several legal issues and policy considerations that have given Biden pause about student loan cancellation, although he prefers Congress to cancel student loans immediately. While a majority of Republicans may not support changing the law to allow for student loan cancellation in bankruptcy, Democrats may be able to find at least several Republicans willing to support such an effort.
If you have student loans, be thoughtful about your next steps for student loan repayment. As an alternative to bankruptcy, make sure you consider these potential options:
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Loans Online – Student loan Cancellation Faces Major Setback