Most Arkansas residents are aware that student loan debt is virtually impossible to get rid of via bankruptcy. However, that could change based on the outcome of two very important cases making their way through the courts right now. If one or both go before the U.S. Supreme Court, the outlook for consumers burdened by heavy student debt could improve, and bankruptcy might become a more appealing option.
Currently, most of the nation’s bankruptcy courts use the same standard when determining whether a borrower’s student loan debt can be forgiven. That standard is known as the Brunner test, and it requires a borrower to prove that he or she cannot maintain a basic standard of living and has no hope of improving his or her financial scenario in the foreseeable future. The borrower must have also made demonstrable efforts to pay down his or her student loan balance.
Another approach to allowing student loans to be discharged through bankruptcy, and one that has been taken by the U.S. Court of Appeals for the 8th Circuit, is to determine whether an individual borrower is living under circumstances that cause undue hardship. Courts using this approach look at multiple factors before making a decision about whether a borrower should have his or her student loan debt discharged. This approach is known as the totality of circumstances test.
As the two high-profile cases move forward, the nation’s courts will be asked once again to consider how to approach student loan debt’s discharge in a bankruptcy case. The matter is of great importance to those in Arkansas who are struggling with dire financial circumstances and have student loans as part of their overall debt scenarios. Currently, the strict approach taken by bankruptcy courts dissuades many from asking for their student loan debt to be discharged, and one estimate suggests that only one out of every 300 filers with student loans includes those obligations in his or her bankruptcy case.
Source: marketwatch.com, “Why student loan borrowers should pay attention to these two court cases“, Jillian Berman, Oct. 21, 2015