Under the current Bankruptcy Code, an individual cannot discharge student loans in bankruptcy unless retaining this type of student debt would cause undue hardship. To determine whether such a hardship exists, the bankruptcy courts conduct an analysis known as the Brunner test.
Why is it called the Brunner test?
Named for the case in which it was first used, Brunner v. New York Higher Education Services Corp., the Brunner test is a three-part system used to determine whether or not a debtor is suffering from undue hardship, and cannot make student loan payments as a result.
The Brunner test is a complicated and often confusing process, and using it to establish undue hardship can be quite difficult. What makes things particularly confusing is that the Bankruptcy Code fails to actually define undue hardship, leaving this decision up to the courts.
The so-called “Brunner Rule” states that student loan debts are only dischargeable under extreme, and very specific, conditions. Although proving undue hardship under the Brunner rule can be difficult, partial discharges on student loans are more common. In some cases, student loan borrowers will be denied any discharge of federal or private student loans, but will be granted a lower interest rate, deferment, or an extension on the repayment period of student loans.
How does the Brunner test work?
In addition to establishing whether physical, emotional, or other problems are affecting the individual’s ability to get and hold a job, the Brunner test determines if the debtor:
Would be unable to maintain a minimal standard of living, and would fall below the poverty line, if student loans had to be repaid;
Is suffering from circumstances that will make repayment a hardship for the remainder of the term, or permanently;
Made good faith efforts to repay the loan.
Even if all three of the above scenarios exist, a hardship-based student loan discharge does not occur automatically in bankruptcy. You must first file a complaint in a separate adversary proceeding. During this proceeding, you will make your case as to why your student loan debt should be discharged as part of your bankruptcy. The judge will consider your argument and any substantiating evidence, and will then make a decision incorporating the aforementioned Brunner rule. It should be noted that the undue hardship standard for the Brunner test is quite high.
Inability to maintain a minimal standard of living
Terms such as “minimal standard of living” are quite subjective. What is considered minimal for one person, could be luxury for another. How does the court determine if you are unable to maintain a minimal standard of living, and off what are they basing that standard?
The bankruptcy judge will first review your financial situation, including monthly income, whether you are employed or self-employed, and the amount of your take home pay. Fixed expenses, such as rent and car payments, and variable expenses, such as utilities and groceries, will be considered next. Non-essential luxuries, including cable and fitness memberships, will be frowned upon. The court wants to see that you are doing everything possible to cut unnecessary expenses and maintain a minimal standard of living. And while making car payments is essential to get you to and from work, saving up for a brand new car would not qualify as minimal living.
Circumstances making repayment a hardship will continue for a significant portion of repayment term
Whether your inability to make the monthly payment on your student loans is based on an emotional or physical disability, or additional circumstances, the court will only consider discharging student loan debt if the condition is expected to be permanent, or at least to outlast the life of the loan.
However, even if you are not granted a full discharge of your loan, it is possible that the bankruptcy judge will grant a partial discharge. In such a situation, a portion of your debt would be discharged, while you remain responsible for the rest. To arrive at a discharge amount, the court will review your income and expense information to determine how much you can afford to pay.
In certain cases, the court will refuse to discharge any of the student loan debt, but may adjust the interest rate or other aspects of the loan to ease the burden of repayment and provide some level of debt relief.
Good faith efforts
In addition to proving that you have fallen on hard times and that the hardship will likely continue for an extended period, you must show that you have tried, in good faith, to repay your loan. But what does the court mean by good faith?
A good faith effort may be established if you can show that:
You have applied for income-based loan repayment plans;
You made payments toward the overall balance at some point;
The student loan is a significant portion of your overall debt.
This does not mean that if you have never made payments you will be automatically disqualified from passing the Brunner test. However, you will likely need to show the existence of a serious hardship if you have never made a single payment on your student loan.
Does the coronavirus outbreak affect how the Brunner test works?
The short answer is no, at least not yet. In the United States, the coronavirus pandemic has resulted in some new legislation related to student loan relief, but nothing specific to bankruptcy dischargeability.
The President signed the CARES Act into law on March 27, 2020, providing an automatic administrative forbearance for individuals with federal student loans. Essentially, the CARES Act pauses student loan payments between March 13, 2020 and September 30, 2020.
Student loans are difficult to discharge in bankruptcy, but it is possible. Furthermore, while you must be able to prove undue hardship to discharge federal and private student loans in a Chapter 7 bankruptcy, Chapter 13 bankruptcy may provide other benefits. Since Chapter 13 “reorganizes” rather than wipes out debt, the debtor is usually able to include student loan payments in the three-to-five year repayment plan. This will likely reduce the amount of your monthly payments and keep creditors at bay during the repayment period. When the repayment period ends, you will be responsible for the remainder, including any interest that may have accrued.
Although the Brunner test is notoriously difficult to pass, some courts have been starting to ease up. As a result, it has been a bit easier to pass the test in recent years. But most bankruptcy cases with student loan debt still do not move forward with adversary proceedings, even though more than three million people have more than $100,000 in student loan debt. If you are overwhelmed, you are not alone. And you have a right to contact your Congressperson and demand a change to the current law.
While Upsolve can help you with a Chapter 7 case, we are not able to assist with the adversary proceeding necessary if you wish to discharge your student loan debt. It is in your best interest to consult with an experienced bankruptcy attorney if you believe the Brunner test could help you reduce or eliminate student loan debt as part of your bankruptcy case. If you have questions related to student loan bankruptcy, be sure to work with a law firm that has extensive experience in bankruptcy law.