In order for a student loan to be discharged, the judge must determine that requiring repayment after bankruptcy would cause an undue hardship on you and your dependents. Because the term undue hardship isn’t defined in the law, different standards have been established over time.
The Brunner Test, named after a landmark bankruptcy court case decided back in 1976, set out a three-part test to determine whether undue hardship exists. Though Brunner is widely regarding as an outdated standard, it remains the guiding principle in most of the country.
A finding of undue hardship requires you to prove all of the following:
- You cannot maintain, based on current income and expenses, a “minimal” standard of living for yourself and your dependents if forced to repay the loans;
- Additional circumstances outside of your control exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of your student loans; and
- You have made good faith efforts to repay the loans.
Explaining the Brunner Elements
As to the first element, the issue is one of a minimal standard of living. The court will look closely at your expenses and, if there is anything that can be cut to pay the student loans then you will lose the argument that you cannot repay the loans and maintain a minimal standard of living.
The second element tries to look into the future. Given the fact that this is impossible, courts require borrowers to present additional circumstances to prove that their present financial situation will persist well into the future, preventing them from making payments through a substantial portion of the loans’ repayment period.
It’s more than your present inability to pay the loans – you’ve got to prove insurmountable barriers to your financial recovery and ability to repay. These additional circumstances include:
- Serious mental or physical disability affecting your employment or advancement;
- Your obligation to care for dependents;
- Lack of, or severely limited education;
- Poor quality of education;
- Lack of usable or marketable job skills;
- Maximized income potential in the chosen educational field and no other more lucrative job skills;
- Limited number of years remaining in your work life to allow payment of the loan;
- Age or other factors that prevent retraining or relocation as a means for payment of the loan;
- Lack of assets, whether or not exempt, which could be used to pay the loan;
- Potentially increasing expenses that outweigh any potential appreciation in the value of your assets and/or likely increases in your income; or
- Lack of better financial options elsewhere.
The third element looks at good faith efforts to repay the loans. Good faith is measured by your efforts to obtain employment, maximize income, and minimize expenses. The courts use several factors in making this determination, including:
- Whether you made any payments before filing for bankruptcy;
- Whether you sought deferments or forbearance;
- The timing of your attempt to have the loan discharged;
- Whether your financial condition resulted from factors beyond your reasonable control; and
- Your efforts to negotiate a repayment plan.
The process can be very expensive and the outcome uncertain, which is why my preference is to look at your entire financial situation and consider bankruptcy only if it would also benefit you if your student loans can’t be forgiven. If an adversary proceeding makes sense at that time, we can review it.
Not every court uses the Brunner test. Courts in Arkansas, Missouri, Iowa, Nebraska, Minnesota, North Dakota and South Dakota use the totality of the circumstances test. This test requires the debtor to prove undue hardship based on three factors:
- The debtor’s past, present, and reasonably reliable future financial resources;
- The debtor’s reasonable and necessary living expenses; and
- Any other relevant facts and circumstances.
Some people see this as being more flexible than Brunner, but in some ways it is far more difficult because these courts have adopted what’s called an all-or-nothing approach that prevents the judge from discharging a portion of the student loans. Faced without the option to find a middle ground, courts in these states may end up being less likely to agree with your claim of undue hardship.