October 3, 2012

Discharging Student Loans in Bankruptcy

In 1987 the 2d U.S. Circuit Court of Appeals decided that Marie Brunner who filed a Chapter 7 Bankruptcy could not discharge her student loans because they did not present an “undue hardship” for her. This “undue hardship” theory created the Brunner Test which is comprised of the Court’s three prong test for determining whether or not the repayment of student loans poses and undue hardship on a debtor.

The three parts to the test determine if (1) the debtor can demonstrate that given his or her current level of income and expenses, the obligation to make monthly payments on a student loan will cause the debtor’s standard of living to fall below a “minimal level”; (2) the debtor must show beyond their current inability to pay the loans that they will simply not have the financial means or prospect of a changing future economic opportunity to repay the student loans during the repayment period; and lastly (3) the debtor needed to demonstrate good faith in order have their student loans discharged which requires that the debtor had made good faith attempts to repay the loans and due to circumstances beyond their control were and are unable to make these payments.

As the years have progressed and with the downturn in the economy in recent years, the Brunner Test language is becoming outdated and currently the U.S. Supreme Court is reviewing the question of whether or not the second prong to the Brunner Test (the requirement that a debtor demonstrate that there are circumstances which prevent their ability to repay their loans will continue for a significant period of time during the repayment period). The Supreme Court is scheduled for conference in September, 2012 to hear the matter.

Posted In: Bankruptcy