The treatment of student loans in bankruptcy is one of the most challenging topics for a debtor. As a general rule, student loans cannot be discharged in bankruptcy unless the debtor proves that paying them is an undue hardship.
The Debtor is required to prove undue hardship using the three part Brunner Test:
(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 growth of for profit colleges and universities such as DeVry, ITT Tech, University of Phoenix, Capella University, Strayer University, and others has changed the bankruptcy lawyer’s strategies for obtaining a discharge of student loans.
The second part of the Brunner Test looks at additional circumstances indicating that you will not be able to repay your student loans. This is allows your bankruptcy attorney to bring additional issues to the court’s attention, including whether you went to a for profit college.
When the Bankruptcy Code was drafted, higher education was non-profit. This influenced Congress’ thinking about discharging educational debts. A non-profit university is focused upon education and enrichment. It also does not have access to capital markets or other forms of funding available to for profit businesses, making it more vulnerable to financial upset. By contrast, a for-profit university is driven by the profit motive, even at the expense of education.
The profit motive is evident in the low graduation rates and high loan default rates seen with for profit colleges and universities. In addition, many for profit schools are not accredited like traditional universities such as the University of Washington. This means that your credits and degree may not be recognized by other schools or employers.
The quality of education is relevant to whether you will ever realize any value from your education and the loans used to finance it. If the court understands that you received a substandard education that has little real world value, then it becomes easier to prove that you deserve a student loan discharge.