A totality of the circumstance test would provide more realistic test for bankruptcy discharge.

One of the more vexing problems for individuals facing a bankruptcy is wondering if it do any good if they have a substantial amount of student loan debt. This type of debt is known to be difficult to eliminate during a bankruptcy because of the “undue hardship” standard that is used by the bankruptcy courts to determine dischargeability of student loan debt.

Congress never defined what “undue hardship” means in the Bankruptcy Code, and so the courts created their own definition. The U.S. Supreme Court has never ruled on this issue, but that could change, as one man has asked to the court to redefine this term in his case.

The current standard employed is often difficult to meet. If a debtor attempting to pay back a student loan is reduced to utter poverty by their loan repayments, they may qualify for discharge. However, they have to meet a three-part test that was developed back in the 1980s.

The test is known as the Brunner test, after the case where it was first used. In the Bankruptcy Code, Congress allowed the discharge of student loan obligation if repayment
“will impose an undue hardship” on the debtor and their family. But the meaning of what constitutes undue hardship has never been clear.

The Brunner Test

The test’s three factors first require a showing by the debtor that they “cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans.”

Second, a debtor must explain that there are “additional circumstances” that mean the “state of affairs” making repayment difficult will “persist for a significant portion of the repayment period of the student loans.”

Third, the debtor must show a “good faith” effort to repay these loans.

For the debtor, the second element can be difficult to obtain evidence for, because they essentially are arguing that they never will be able to earn enough income to repay their debt, which is inherently speculative. It forces the debtor to prove the negative, that they will never improve their earning capacity.

In addition, the “good faith” requirement is very subjective, as the case of a man with $260,000 in loans, no job, who has failed the bar exam twice, has a criminal record and is reduced to living in his 86-year mother’s home shows.

The court found he had not made a sufficiently “good faith” effort to repay his debt, and therefore his hardship was not “undue.”

Time for a change

The Brunner test was developed when Congress still feared great numbers of students were using student loans to get an education and then would file bankruptcy to discharge those loans. Subsequent history has shown that there is no substantial evidence that that ever occurred.

Times have changed. Millions of students strain under the student loan burden they carry. A more fair, totality of the circumstance would permit judges more discretion and prevent any potential “floodgates” of debtors from discharging their student loans.

Perhaps the Supreme Court will correct this overly restricted standard, and permit more students to obtain the fresh start allowed by the Bankruptcy Code. But while we wait for that decision, Chapter 13 can help some debtors with student loans. Contact a bankruptcy attorney at Newman, Williams, Mishkin, Corveleyn, Wolfe & Fareri, P.C., to discuss your situation.

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