When Can Student Loans be Discharged in Bankruptcy?

As we have noted on the blog before, student loan debt is a huge problem among consumers.  Most of the time, student loan debts cannot be discharged in bankruptcy.  However, if you can prove an undue hardship, the student loan debt can be discharged.  Note that it is rare for a court to find that a debtor meets this burden.

Undue Hardship

The section of the Bankruptcy Code that deals with student loans and the discharge is 11 U.S.C. § 523(a)(8).  Congress enacted this section of the Bankruptcy Code to prevent students from abusing the fresh start principle of bankruptcy by filing for bankruptcy and attempting to discharge their student loans after graduation.  Section 523(a)(8) states that a bankruptcy discharge does not discharge a debtor from a student loan debt “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.”

The Brunner Test

Section 523(a)(8) does not define the phrase “undue hardship.”  However most Circuit Courts, including the 11th Circuit which contains Alabama, have adopted the “Brunner test” when determining whether a person’s student loan debt can be discharged in bankruptcy.  This test was established in the case of Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987).  Under the Brunner test, in order to show undue hardship a debtor must establish:

1. "that [he or she] cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
2. that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3. that the debtor has made good faith efforts to repay the loans.” Brunner, 831 F.2d at 396.

In order to meet the first part of the test, the debtor must show that he or she cannot maintain a minimal living standard if forced to pay the loan.  Courts can look to the debtor’s bankruptcy schedules and to the debtor’s testimony in determining whether this prong of the test is met.

Inability to Pay Loan Will Continue

The second element of the Brunner test requires that there be additional circumstances that show that the inability to pay the loan will likely continue for most of the repayment period of the loan.  These additional circumstances show the court that the debtor’s hardship is more than the normal hardship that would cause one to file bankruptcy.  This requirement is a tricky one and is the one that often prevents the student loans from being discharged.  It is very hard to prove to a court that there will be no increase in income over the life of the loan repayment.

Lastly, the final element of the Brunner test is that the debtor has made a good faith effort to repay the loan.  This can be shown by evidence that the debtor has paid on the loan to the best of his ability.

If you are like many other consumers in this country and are having problems repaying your student loans, please make an appointment with one of our experienced attorneys to discuss your options.