Millions of Americans have significant student loan debt. A large percentage of our clients that are struggling to meet their daily living expenses will also have a large student loan burden. They are battling a delinquent mortgage or credit cards, and filing for bankruptcy may provide relief. But sadly, we must tell most of those clients that we cannot help with their student loans.
Theoretically, you can discharge student loans. However, there are strict (and very high) standards the debtor must meet. In practicality, most people cannot discharge their student debt. Let’s take a look at the process and examine what you can expect if you’re trying to discharge your student loan debt in bankruptcy.
The only real requirements for obtaining a guaranteed student loan are that you are (a) enrolled in school, and (b) you are not in default of another student loan. Lending institutions generally do not check the creditworthiness of the applicant, because they have a federal guarantee in case the loan goes bad. With little risk of loss on these loans, student loans are very lucrative to large institutions. Resistance from the lending institutions is the first obstacle you’ll meet when attempting to discharge student loans in bankruptcy. The lender simply does not want to abandon the federal guarantee and take a loss on one of its cash cows. The resistance can be fierce, and the lender may even initially attempt to collect from debtors who are permanently disabled, chronically poor, or very elderly.
The primary consequence of the resistance is that the legal cost of attempting to discharge student loans is high, and will easily be thousands of dollars. The student loan debt needs to be very large for the litigation to be worth risking the necessary legal cost to initiate the fight.
Brunner Test Overview
In order to discharge student loans, you must show that continuing to enforce the student loan obligation will cause an "undue hardship" on the debtor. This standard arises from the 1987 case Brunner v. New York State Higher Education Services Corporation. How “undue hardship” is defined is kind of vague, causing the results to vary from jurisdiction to jurisdiction.
The infamous Brunner Test has thwarted the bankruptcy discharge efforts of many student loan debtors but it has also helped debtors free themselves from debt that they could never repay. In a 2013 bankruptcy case, a former law student who had failed the bar exam three times and ended up in a low-paying job, requested a discharge of his $85,000 student loan. Applying the standards of the Brunner Test, the bankruptcy trustee found that the debtor had made reasonable efforts to repay his loan, that his expenses were reasonable, and that it was unlikely that his income would improve enough for him to repay such a large debt. When the Brunner Test is applied fairly, many debtors can get their student loan debts discharged. Let’s take a closer look at the standards of the test.
Brunner Test Standards
1. Maintaining minimal living standards is impossible. The first standard of the Brunner test is your ability to maintain your household’s minimal living standards if you repay your student loans. If it’s determined that you cannot afford to keep your family fed, housed, and clothed if you’re forced to repay your student loan, then you pass the first part of this test. It’s important to note that your household will include yourself and anyone who is dependent on you. This means that if you’re caring for an elderly parent or disabled adult child, their expenses will be accounted for when judging your ability to repay your student loans.
2. Your situation isn’t likely to change. One of the fears of bankruptcy trustees and lenders is that debtors will discharge their student loans then go on to earn more money in the future. The second part of this test is designed to determine the likelihood of your circumstances improving. Since it’s impossible for anyone to predict the future, this part can become tricky. You must prove to the bankruptcy court that your situation is unlikely to improve. The trustee will examine any evidence presented by you, so you’ll need to work with your bankruptcy attorney to deliver a coherent explanation. Some plausible reasons for unchanging circumstances may include chronic illness, disability, and incarceration, but these circumstances alone aren’t enough to justify a discharge. Also, the bankruptcy law doesn’t specifically define what circumstances could justify a bankruptcy discharge just that you must prove that it isn’t likely that you’ll be able to repay the loan in the future. If you can do that, then you can pass the second part of the test.
3. You made a good faith effort to repay student loans. This part of the Brunner Test seems pretty straightforward, but lenders often use it to challenge the discharge of otherwise worth debtors. On its base level, someone who is in default and/or who has never paid a dime on their student loans probably won’t pass this part of the test. However, if the debtor can prove that they’ve made some payments on their loans and received deferments or income contingent repayment plans throughout the life of their loan, they may pass this part of the Brunner Test.
Discharging student loans in bankruptcy is an extremely complex process because it requires a deep understanding of the law and awareness of previous bankruptcy cases involving student loans. And it is relatively rare to find a person that can meet all three prongs of the Brunner test.