One of the biggest myths surrounding the massive student loan crisis in the U.S. is that these debts are never discharged by bankruptcy courts.
While it’s not an easy thing to do, it is possible. That was proven early in January when a bankruptcy court judge wrote off more than $220,000 in student loan debt for a law school graduate.
Bankruptcy court releases “stunning” decision
The ruling by Chief U.S. Bankruptcy Judge Cecilia Morris is regarded as a remarkable decision that, if it is upheld on appeal, could make it easier for others with massive student loan debt to sue to have those obligations dismissed.
Morris’s decision erases student loan debt for Kevin Jared Rosenberg, 46, who worked for a short time as a lawyer. However, he has owned an adventure tour business for the past 10 years and has an annual income of $38,000.
Judge applies Brunner Test in ruling
In her decision, Morris says courts have routinely misapplied the “Brunner Test,” a three-pronged standard for erasing college debt, in which a person must prove:
- Repaying your student loans prevents you from supporting yourself and your dependents
- Your current financial situation will likely persist and is not your fault
- You have already made a good faith attempt to repay loans through increasing your income and reducing expenses
Only a small fraction sue to have student loans discharged
Research by Villanova University finds that nearly 250,000 student loan borrowers file for bankruptcy each year, but only about 400 sue to have that debt discharged. Judge Morris believes that’s due, in part, to the Brunner standard not being used as it was originally intended.
Legal experts say loan service providers will likely appeal Morris’s ruling. If a higher court affirms the decision, they believe it could have rippling effects across the nation to deal the with massive student loan debt, which has reached $1.4 trillion in the United States.