Does Filing Bankruptcy Eliminate Student Loans in California?

Student loan debt is a significant burden for many individuals in California. When financial hardship strikes, some people consider filing for bankruptcy as a potential solution. However, the relationship between bankruptcy and student loans is complex and often misunderstood. This blog post aims to clarify whether filing bankruptcy can eliminate student loans in California.

Table of Contents

1. Understanding Bankruptcy
2. Student Loans and Bankruptcy
3. The Brunner Test
4. Recent Changes and Reforms
5. Alternatives to Bankruptcy
6. Conclusion

1. Understanding Bankruptcy

There are two primary types of bankruptcy that individuals may file: Chapter 7 and Chapter 13.

• Chapter 7 Bankruptcy: Known as “liquidation bankruptcy,” it involves selling off assets to pay creditors. It typically takes a few months to complete.
• Chapter 13 Bankruptcy: Known as “reorganization bankruptcy,” it involves creating a repayment plan to pay off debts over three to five years.

2. Student Loans and Bankruptcy

a. General Rules

Under federal law, student loans are generally not dischargeable in bankruptcy. This includes both federal and private student loans. The rationale is that student loans are considered a public good, and discharging them too easily could undermine the student loan system.

b. Exceptions to the Rule

There is an exception to this general rule: student loans may be discharged if the borrower can demonstrate that repayment would cause “undue hardship.”

3.  The Brunner Test

a. Criteria

The Brunner Test is the standard used by most courts to determine “undue hardship.” It has three criteria:

• Poverty: The borrower cannot maintain a minimal standard of living if forced to repay the loans.
• Persistence: The financial situation is likely to persist for a significant portion of the repayment period.
• Good Faith: The borrower has made good faith efforts to repay the loans.

b. Application in California

California follows the Brunner Test to evaluate undue hardship claims. However, courts in California have historically been stringent in applying these criteria, making it challenging for borrowers to discharge student loans through bankruptcy.

4. Recent Changes and Reforms

There have been discussions and legislative proposals aimed at making it easier to discharge student loans in bankruptcy. For instance, the Student Borrower Bankruptcy Relief Act seeks to amend the bankruptcy code to allow for the discharge of student loans without the need to prove undue hardship. As of now, these reforms have not been enacted, but they may signal future changes.

5.  Alternatives to Bankruptcy

For those struggling with student loan debt, there are alternatives to bankruptcy:

• Income-Driven Repayment Plans: Federal student loans offer repayment plans based on income.
• Loan Forgiveness Programs: Certain public service jobs may qualify for loan forgiveness.
• Refinancing: Lowering the interest rate through refinancing can reduce monthly payments.
• Negotiation: Some lenders may be willing to negotiate more manageable terms.

6. Conclusion

While bankruptcy can provide relief for many types of debt, discharging student loans through bankruptcy in California is exceptionally challenging due to the stringent Brunner Test criteria. Borrowers should explore all available options and seek professional advice to determine the best course of action.

Student loan debt is a complex issue, and understanding your rights and options is crucial. If you’re considering bankruptcy, consulting with a bankruptcy attorney who specializes in student loans is highly recommended.