As it currently stands, consumers in California and across the nation face very difficult battles when trying to have their student loan debt discharged during bankruptcy. That could change, however, as two important cases make their way through the court system. At least one will be heard by the U.S. Supreme Court, which has not changed the approach toward student loans and personal bankruptcy since 2005.
Currently, very few individuals are able to have their student loans discharged via bankruptcy. This is based on a standard developed in the 1980s, known as the Brunner test, which is used in most parts of the country. The Brunner test requires that a filer prove that he or she cannot meet existing loan payments while also maintaining a minimum standard of living. To make matters even more challenging, the filer must also prove that his or her financial circumstances are unlikely to improve, and that a good faith effort has been made to repay student loans prior to filing for bankruptcy.
A less strident approach is used in the U.S. Court of Appeals for the 8th Circuit. This test is known as the totality of circumstances test, and it considers a number of factors when determining whether a borrower has the ability to repay his or her student loans. This broad-based view is heralded by many as a better way to approach the matter, and many believe it is a view that gives individuals the chance to eliminate student loan debt.
As the two current cases move ahead, the nation's courts will be asked to weigh in on how an individual's financial scenario should be evaluated during bankruptcy. Estimates assert that only one out of every 300 filers currently ask the courts to eliminate student loans during bankruptcy. If the courts agree to take a wider view than that used in the Brunner test, many borrowers in California and beyond could find personal bankruptcy to be a far more attractive option for obtaining debt relief.
Source: marketwatch.com, "Why student loan borrowers should pay attention to these two court cases", Jillian Berman, Oct. 21, 2015