Sadly when it comes to student loans, bankruptcy is generally not the answer. Changes to the Bankruptcy Code in 2005 make private student loans from lending institutions no longer dischargeable. Extreme conditions of privation or disability have to be met.

Bankruptcy courts relay on the three-part Brunner test to determine if extreme hardship allows a student loan to be discharged in bankruptcy. It’s based on a 30-year-old U.S. Court of Appeals decision. The three criteria to be met are:

  • 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;
  • 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;
  • that the debtor has made good faith efforts to repay the loans.

At first impulse, it would seem that being unemployed, or vastly underemployed, would allow a freshly minted college graduate to meet these criteria. But not so fast—court interpretations have been beyond stringent in interpreting these three elements and especially in determining what constitutes “undue hardship.”

In a nutshell, even living below the poverty level has not been considered an adequate reason to discharge any student loan debt in bankruptcy. Even in cases of total disability courts have placed incredibly stringent requirements.

In one recent case, regarding a young man named Wallace, an Ohio bankruptcy court ruled that his total disability wasn’t really “total.” The guy graduated from college, got a managerial job in information technology and the future looked promising. However, after a year complications from diabetes affected his vision to the point of blindness. Then he developed kidney disease, resulting in continuous dialysis and numerous surgeries for kidney transplants. The Social Security Administration declared him permanently disabled.

Absurdly, in 2006 the bankruptcy court ruled that Wallace didn’t meet one of the three criteria of the Brunner case: he wasn’t suffering from undue hardship!

See documentary: Documentary on Student Loans

Default: the Student Loan Documentary (Trailer)

Decisions like this do not bode well for college graduates who cannot find work in this tanked economy.