The seminal case on the subject is Brunner v. New York State Higher Education Corporation. In that decision, the Court held that a debtor must demonstrate “undue hardship” to have their student loans discharged. “Undue hardship” should really merely mean a significant burden on the debtor after filing bankruptcy. However, in the world of bankruptcy and student loans, it has come to mean something very different. It means (1) the debtor has made a good faith effort to repay the debts, but (2) something has changed to create a situation where repaying loans would put the debtor below a minimum standard of living, and (3) that it is highly unlikey the debtor will ever be able to pay the loans again.
This is a really tough standard to meet. What is so crazy about this standard is that someone who is so poor that he or she was unable to make payments before filing bankruptcy is not eligible to discharge his or her student loans! Courts have used terms like “total incapacity,” “certainty of hopelessness,” and “stripping of all that makes life worth living” to explain this test.
Moreover, Congress never intended this result. Nowhere else in federal law is “undue hardship” interpreted this strongly. Plus, when Brunner was decided, all student loans could be discharged five years after graduating without a showing of "undue hardship."
The purpose of bankruptcy is to help the entire economy by allowing individuals who take financial risks, like going to college, opening a business, or trying a new career, move on from a failed venture. It thereby encourages higher education and entrepreneurship. Plus, it places some of the burden for loss on the lender, which should encourage better lending practices.
Right now, the law is backwards. Lenders and schools bear no responsibility; instead, middle-class and lower-class teenagers trying to get ahead in life bear the entire responsibility. This is tying up an entire generation, preventing them from innovating and founding new businesses, which are key to the continued success of the American economy.
Let's hope that the U.S. Supreme Court gets this one right. It should be an easy one. The current interpretation is not what Congress intended, nor what the plain language of the statute means, and the policy is disastrous for average people. There is a 1.4 billion dollar student loan bubble waiting to pop and destroy the economy. Perhaps the Supreme Court can let a little of the air out.
In the mean time, contact Croke & Croke about your delinquent or defaulted student loans. Let us help you get your life back.
For more info, go to Above the Law's Website where you can find a series of articles on the subject. Also, check out the Huffington Post's recent article on Tezlaff's case.