What is an Adversary Proceeding and How Does it Help With Student Loans?

Adversary proceedings are the tool to fight student loans in bankruptcy

Image by Thao Le Hoang via Unsplash

If you’ve got student loans you can’t afford, one of the possible routes to relief is bankruptcy discharge. Before the 2005 bankruptcy reform act, it was much easier to unload student loans in bankruptcy if your financial situation was rocky. Post-2005, it became much harder - almost impossible in fact. But now the tides are turning again and it’s increasingly possible to diminish or eliminate your student loans in bankruptcy, but step one is an Adversary Proceeding. Let’s look at what it is and why it’s necessary.

What is an Adversary Proceeding?

When you file bankruptcy, you can’t just list your student loans in the case and ask for their discharge alongside your other debt. Instead, you must file a separate action called an Adversary Proceeding. It’s essentially like a civil complaint where you sue your student loan servicer seeking relief for the debt you owe them for your education.

An adversary proceeding is an entirely separate lawsuit, so there is an extra charge to file it. It’s adjacent to your bankruptcy case, but a separate action. Adversary proceedings are for other issues attached to bankruptcy such as trying to shed a lien on real estate or student loans. Your lawyer files a complaint on your behalf with the bankruptcy court.

How an Adversary Proceeding Works

Your lawyer writes up and files the adversary proceeding. It lists the reasons under the law that the court should rule in your favor and discharge the debt – in this instance, your student loans. The court issues a summons, and a copy of the paperwork must be sent to the loan servicer by your lawyer. The loan servicer has a set time to respond to the court.

If the loan servicer fails to respond, the court can issue a summary judgment in your favor. It’s rare that a loan servicer won’t reply. They usually fight tooth and nail to try and keep the debt alive, even if the debtor is unable to pay, dying, or has other dire circumstances. Loan servicers are notoriously relentless, but judges are increasingly resistant to their tactics.

Undue Hardship is the Standard

The US Bankruptcy Code sets the standard for discharge of student loan debt in bankruptcy as “undue hardship.” But what does that mean? The law is silent on this point. It sets this as the benchmark, then doesn’t define it. The lack of specificity leaes it up to the bankruptcy court to interpret. The court often uses the Brunner Test to decide undue hardship.

Brunner was the plaintiff in a student loan case from years ago. The test is three-prong and says that petitioners who want student loan discharge in bankruptcy should demonstrate:

• That if forced to make your student loan payments, you can’t maintain a reasonable standard of living for you and your dependents.
• That the financial circumstances that prevent you from paying your student loans will continue for a time equal to or longer than the repayment term.
• That you made a good faith effort to repay your debt (for example: you made some payments, tried to negotiate with the lender, etc.)

How Often Does an Adversary Proceeding Succeed?

It’s a myth that student loans can’t be forgiven in bankruptcy. In fact, the biggest obstacle is that most people don’t ask for help with their student loans in bankruptcy. Just .1% of bankruptcy filers with student loans try to include their college debt in their case.

Of those who do, nearly 40% get a partial or total discharge of student debt, and that’s on the rise. Your odds of success are better if you have chronic unemployment, a serious and ongoing illness or disability, are older, or earn low wages with the situation set to continue.

To find out of you might be eligible for student loan relief in bankruptcy contact the Law Offices of John T. Orcutt. Read reviews, then call +1-833-627-0115 to schedule a free student loan bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro or Wilmington.