Student loan cancellation refused by the Supreme Court: here’s why

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The United States Supreme Court dismissed a student borrower’s petition to have his student loan canceled.

Here’s what you need to know and what it means for your student loans.

Student loans

A student loan borrower, Thelma McCoy, asked the court to cancel nearly $ 350,000 in student loans after the 5th U.S. Court of Appeals ruled that her student loans could not be canceled in the event bankruptcy. The court dismissed McCoy’s request for certiorari. McCoy borrowed $ 175,000 in student loans to earn a university degree, master’s degree, and doctorate. While earning her doctorate, McCoy suffered injuries and said she couldn’t find a job due to her disability. McCoy argued that paying off student loans was creating undue financial hardship. Unable to pay his student loans, McCoy filed for Chapter 7 bankruptcy in Texas federal court to pay off his student loans, which had grown with interest to $ 350,000. However, McCoy did not get his student loan canceled. Why?


Student loan cancellation refused

McCoy raised an interesting legal point in his petition: that the United States Supreme Court should clarify the legal standard to be applied to the cancellation of student loans with respect to bankruptcy. For example, there are two main legal standards that circuit courts apply in determining whether a student loan borrower can pay off student loans in bankruptcy. The first legal test is called the Brunner test, which is the legal test in all shorts except 8th and 1st circuit. The 8th circuit applies a second legal test, a set of circumstances, which is akin to Brunner, while the 1st circuit has not yet declared a standard. McCoy argued that the United States Supreme Court should clarify which standard courts should apply. Why? Otherwise, according to McCoy, without universal application, different courts can interpret the law differently, which can lead to disparate results.


Student loan cancellation: the Brunner test

Unlike mortgage or credit card debt, student loan debt is generally not dischargeable in bankruptcy. However, it is possible to get a student loan discount if a student loan borrower can demonstrate undue financial hardship. For example, most student loan borrowers who apply for student loan cancellation in bankruptcy must meet the Brunner test. To pay off student loans through bankruptcy, adversarial proceedings (a lawsuit in bankruptcy court) must be filed, and a debtor would argue that paying off student debt would create undue hardship on the debtor. the Brunner standard says:

  1. the student loan borrower has extenuating circumstances creating a hardship;
  2. these circumstances are likely to persist throughout the life of the student loan; and
  3. the borrower made a good faith attempt to repay the student loan.

The bankruptcy court found that McCoy did not comply with the second prong of the Brunner test. The United States District Court for the Southern District of Texas and the 5th Circuit have both upheld. Why? The court found that McCoy’s health problems mainly occurred before she borrowed most of her student loans and that her health problems had not impacted her ability to complete her education or to continue. find a job. This makes McCoy another student loan borrower who won’t get his student loan canceled.


Major setback for student loan cancellation?

Is this a major setback for the cancellation of student loans? No. This was a special case involving a student loan borrower who the court found did not meet the legal standard for student loan forgiveness. However, the United States Court of Appeals for the Second Circuit rendered a ruling in April that could make it more difficult to discharge student loans in bankruptcy. In tingling, the second circuit – which is the same tribunal that created the Brunner Standard – affirmed that there is a heavy burden in paying off student loans in bankruptcy. This has important legal implications, as it signals to student loan borrowers that the cancellation of their student loan requires a high bar. While other circuit courts do not have to take this same approach, the second circuit has reaffirmed that the Brunner test is reasonable, even if the burden is high. This is potentially bad news for student loan borrowers who were hoping the Second Circuit could relax its application of the Brunner test so that more student loan borrowers can be discharged from their student loans in bankruptcy.


What this means for your student loans

Will you get your student loan canceled? Many student loan borrowers wonder if their student loan cancellation has been canceled. However, this latest court case comes at a time when President Joe Biden has canceled $ 3 billion in student loans. The United States Supreme Court rejected certiori, meaning the court chose not to hear the McCoy case. The Court did not rule on the merits of the case. Concretely, this means that the Brunner The test and standard of all the circumstances will continue to be applied in circuit courts. While McCoy argued that there are major differences between the standards that have created disparate application and results, the federal government argued that the differences are relatively minor. It is always possible to get a student loan canceled in the event of bankruptcy. For example, a Navy veteran lost $ 220,000 in student loans and a doctor got $ 430,000 in student loan cancellation. However, if you are considering canceling a student loan in bankruptcy, the facts of your case and specific circumstances may determine the outcome. Finally, Congress can amend the United States Bankruptcy Code to help more student borrowers get their student loan forgiven. To date, this has not happened, but there is bipartisan support to help student loan borrowers get more student loan relief in bankruptcy.

Bankruptcy is usually a last option for student loan borrowers, and there are several important considerations. If you have student loans, make sure you understand all of your options for paying off student loans. Consider these popular options first:


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