Many New Mexicans face daunting student loan payments each month that restrict their abilities to buy homes and vehicles as well as, ironically, to begin to put money away for their own children’s future college educations. While the federal government and some private lenders offer repayment plans based on income that reduce monthly payments as well as other options like deferment or forbearance, some student loan debtors are either not eligible for relief or even with it, the payments are still very difficult.
Is bankruptcy an answer?
Anyone in this position should talk to a consumer bankruptcy attorney about whether bankruptcy could be an option for relief. Typically, getting student loans discharged (extinguished) in bankruptcy is difficult because the law requires that the loans cause the debtor “undue hardship.”
Still, discharge of student loans does sometimes happen when people are able to show the court that undue hardship exists that justifies this relief.
The undue-hardship standard
The New Mexico federal bankruptcy court is in the 10th Circuit, which applies the so-called Brunner test to decide if undue hardship exists. A recent U.S. District Court case out of Kansas, also in the 10th Circuit, Educational Credit Management Corporation v. Murray, explains the Circuit’s approach.
The 10th Circuit requires that courts in the circuit not apply the test with an “overly restrictive interpretation,” which could be too harsh. Courts are also to consider “all of the facts and circumstances.” To meet the test, the debtor must prove all of these:
1. If the loans payments were made, the debtor and his or her dependants would not meet a “minimal standard of living,” defined as living “within the strictures of a frugal budget.”
2. This situation is likely to continue during a “significant portion” of the student-loan repayment period.
3. The debtor has tried to pay them in good faith.
The Murray court affirmed the bankruptcy judge’s opinion in which the judge had discharged the interest due under the student loans, but not the principal. Paying the principal would still allow a minimal standard of living, but the additional interest amount would not, according to the judge.
Anyone having trouble making student loan payments should seek legal advice about whether the situation could be seen as “undue hardship” making bankruptcy an option.