The Hurdle of “Undue Hardship”

Student loans, and issues concerning student loan forgiveness, continue to be a major point of interest throughout society. On a daily basis, we see media reports and news items regarding President Biden’s consideration of student loan forgiveness, as well as items pertaining to how much total student loan debt is owed, or whether revising the bankruptcy code for student loans might be desirable. Because student loans have such a massive impact on our society, we will almost certainly continue to hear about this topic more and more in the coming months. When it comes to discharging student loans in bankruptcy, most Americans are aware at this point that standard bankruptcy protections are not available for these loans. In a very real sense, this makes student loan debt unique among virtually all other types of debt. Nearly all debts, including gambling debts, can be discharged in bankruptcy, but this is not the case with student loans. To discharge student loans in (Chapter 7) bankruptcy, a debtor has to show that he or she would suffer “undue hardship” if the loan were to be preserved. Traditionally, demonstrating undue hardship has been very difficult, as we will explore.

The Challenge of the Brunner Test

Not only is the term “undue hardship” ambiguous by itself, this term is all the more murky considering that Congress never included a formal definition in its legislation or other official commentary. This means that the construction and interpretation of this term has all occurred in the courts. Most courts have adopted the so-called “Brunner Test,” which was named after a 1987 case involving Marie Brunner. In that case, Ms. Brunner tried to dissolve her student loans less than one year after finishing her master’s degree. The court in Brunner outlined a three-pronged test for assessing undue hardship: (1) the student loan repayment requirements result in a standard of living which falls below a certain minimal level, (2) the current financial situation of the debtor is not likely to change in the near future, and (3) the debtor made a good-faith effort to repay the student loan during the period prior to the bankruptcy filing. Although this test may sound as though it’s not overly difficult to pass, the truth is that just a small fraction of those who’ve applied under this test have been successful. In other words, based on how courts have applied this test so far, we can say that most judges narrowly interpret these requirements such that very few debtors will attain a discharge of their student loans. This is precisely why seeking counsel from an experienced bankruptcy attorney prior to filing can be so beneficial: an attorney will be able to give a reasonable estimation, based on the case law evidence, about the probability of success. Importantly, the Brunner test isn’t the only approach used by courts to determine the eligibility of student loans in bankruptcy. Certain courts, notably the Eighth Circuit, have developed approaches which are a bit less restrictive. So, for instance, the Eighth Circuit has used the “totality-of-the-circumstances” test, which basically looks at a borrower’s entire situation, including present income, probably future income, reasonable living expenses, and other factors relevant to the proceedings.

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