If you’re reading this article, there’s a good chance that you’re among the 45 million Americans who have student loan debt. And if you’re anything like the average student loan borrower, you owe roughly $39,000 in student loans and make an average monthly student loan payment of nearly $400.
Perhaps you are struggling to make payments on your student loans – or have even defaulted on them – and are wondering if your student loans can be canceled (the legal term is “discharged,” meaning your liability to repay the loan has been eliminated) by filing bankruptcy. If so, you’re not alone.
Can student loans be discharged in bankruptcy? Yes, it is possible, but…
The consequences of defaulting on student loans are significant, resulting in calls from collection agencies, damaged credit, possible wage garnishment, and forfeiture of tax refunds.
But if your credit is already poor because your student loans have become unmanageable and you’re unable to make payments or you’ve spent years making payments on interest with little effect on your balance, attempting to eliminate them through bankruptcy may be worth considering.
Make no mistake, however, discharging student loans through bankruptcy is difficult.
That was not always the case. Before 1976, debtors could discharge student loan debt like most other types of unsecured consumer debt, such as credit card balances and medical bills.
That ended in 1976 when Congress amended the Higher Education Act of 1965, making student loans non-dischargeable in bankruptcy unless a debtor could prove that not discharging their student loans would cause “undue hardship,” a notoriously high legal bar that is difficult to clear.
So, while you may be able to get your student loans discharged under certain circumstances, the process is more burdensome and uncertain than it is for other types of debt.
Proving Undue Hardship: The Standard for Getting Student Loans Canceled in Bankruptcy
In addition to filing Chapter 7 or Chapter 13 bankruptcy, you will need to file what’s known as an “adversary proceeding,” which is a separate lawsuit filed within the bankruptcy case. It is in the adversary proceeding where you must demonstrate that repaying your student loans would cause you “undue hardship.”
However, Congress has never defined the term “undue hardship,” leaving it up to bankruptcy judges to decide what that term means. Depending on where a bankruptcy case is filed, the judge will apply either the “Brunner test” or the “totality of circumstances” test to assess a claim of undue hardship in bankruptcy.
The Brunner Test
Most states determine what constitutes undue hardship by applying the Brunner test, which is based on the 1987 case of Marie Brunner v. New York State Higher Education Services Corp., decided by the United States Court of Appeals for the Second Circuit.
Marie Brunner, a recent graduate with a Masters degree in Sociology who was struggling to find work in her field, attempted to discharge her $9,000 in student loans in bankruptcy. Ms. Brunner represented herself in court and lost the case, unable to persuade the judge that paying off her student loans constituted undue hardship.
The standard for undue hardship which the judge established in the Brunner case, which has become the standard in most jurisdictions since then, required that the debtor demonstrate all three of the following:
- that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor or his or her dependents if forced to repay the loans;
- 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
- that the debtor has made good faith efforts to repay the loans.
Ms. Brunner failed the test on all three counts, with the court finding that she was young, healthy, had no dependents, and that the job market in her field did not preclude future employment despite her current difficulty in finding work in her field. Moreover, the court deemed that Ms. Brunner did not “evidence a good faith attempt to repay her student loans” because she did not consider alternatives such as deferment, forbearance, and income-based repayment prior to filing bankruptcy, which she did within a month of the date the first payment of her loans came due and only ten months since she had graduated from school.
Regardless of the merits of Ms. Brunner’s argument, the unfortunate legacy of this case has been a precedent for determining undue hardship that is both rigid and impractical given the changing nature of student loan debt over the last four decades.
Totality Of The Circumstances
Over the years, many legal experts and consumer advocates have criticized the Brunner test as unduly harsh and inflexible. In fact, several courts – including the Eighth Circuit Court of Appeals, which includes Minnesota – have adopted a different approach, which has become known as the totality of the circumstances standard, to determine if a plaintiff can discharge their student loan debt in bankruptcy.
Several important cases in the Eighth Circuit have informed this decision, including the 1981 case of Andrews v. South Dakota Student Loan Assistance Corporation, the 2003 case of Long v. Educ. Credit Mgt. Corp, and the 2013 case Conway v. National Collegiate Trust.
The totality of the circumstances test considers:
- Past, Present, and Reasonably Reliable (Likely) Future Resources: Unlike the Brunner test, which looks at how much money a debtor could possibly make, the totality of the circumstances standard requires judges to consider how much money the debtor will probably make. This is a more reasonable standard when determining if a debtor can pay back their student loans.
- Reasonable Necessary Living Expenses: Instead of determining living expenses according to the “minimal standard of living” threshold as set by Brunner, the totality of the circumstances applies a “reasonable necessary living expenses” standard, which assumes a comfortable – if not extravagant – existence.
- Any Other Relevant Facts and Circumstances: The ability to consider other relevant information gives a bankruptcy judge greater latitude in these cases, which benefits the debtor.
The totality of circumstances test is the standard applied by Minnesota bankruptcy judges to assess a claim of undue hardship with respect to the discharge of student loans in bankruptcy. While still a high bar to clear, the greater flexibility of this standard as compared to the Brunner test has meant more Minnesotans have been able to successfully argue undue hardship and get their student loans discharged, whether in part or in full.
Bankruptcy for Student Loans: Key Takeaways
If your student loan debt has become overwhelming and bankruptcy is a path you’re considering, here’s what you need to know about proving undue hardship for student loans:
- If you have a large student loan balance, have limited financial means, and have made some efforts to pay down your student loan, you stand a better chance of receiving a discharge in bankruptcy of at least some of your student loan debts in Minnesota.
- Ironically, you may stand a better chance of getting your student loans discharged if you have other types of unsecured debt like credit card debt or medical bills. If student loans are your only type of debt you are less likely to succeed in getting them discharged in bankruptcy.
- Discharging student loan debt in bankruptcy, while possible, is not easy and certainly does not guarantee that you will walk away debt-free. You must also bear in mind that achieving a discharge of student loan debt will require that you file and prevail in a bankruptcy adversary proceeding, which will be complicated and can be costly to pursue.
- Before filing bankruptcy in an attempt to discharge your student loan debt, make sure you have considered all the alternatives, such as deferment, forbearance, and income-based repayment.
- Filing bankruptcy is a big decision, and you are advised to consult with an experienced bankruptcy attorney to discuss your options.
One final note: Discharging student loans in bankruptcy may get easier if recently introduced bills that address student loan debt become law.
The first, the Consumer Bankruptcy Reform Act (CBRA), was introduced to Congress in December, 2020 by Senator Elizabeth Warren (D-MA) and four other Democratic members of Congress. The CBRA would amend the bankruptcy code to make both private and federal student loans fully dischargeable and treated like other unsecured consumer debts.
The Fresh Start Through Bankruptcy Act of 2021, by Senators Dick Durbin (D.-Ill.) and John Cornyn (R-Texas), would make federal student loans eligible for discharge in bankruptcy ten years after the first loan payment is due for student borrowers who have no realistic path to pay back overwhelming student loan debt.
Unfortunately, it is impossible to say whether or when any legislation making discharge of student loan debt in bankruptcy easier might be passed and become law.