Article on Test for Discharging Student Loan Debt

The New York Times has an article today on the  most-commonly used test for discharging student loans during bankruptcy.  That test, called the Brunner test (after the eponymous case), has three prongs:

  1.  “[T]he debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans”;
  2. “[A]dditional 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
  3. “The debtor has made good faith efforts to repay the loans.”**

In other words, the debtor must show she can’t maintain a minimal standard of living, that state of affairs will persist, and she has made a good faith effort to repay her loans.  She must meet all three prongs to prove her student loans are causing an undue hardship, which is the standard for discharging them under the bankruptcy code.

Although this test is widely-used, the article notes that it isn’t binding in all courts – so some judges use a different test.  Other judges have criticized it, including legal luminary Judge Easterbrook.*  Interestingly, when the test was adopted, student loans were dischargeable during bankruptcy after a waiting period.  Today, that avenue for discharging student loans doesn’t exist.  Congress got rid of it in 1998.  The only way to discharge loans is to satisfy the Brunner test.  That’s made some people question whether the Brunner test is now too strict, since there’s no other safety valve for borrowers who can’t repay their school loans.

Overall, the article is certainly worth a read.  The snippet I found most interesting:

In 2014, 16 percent of all bankruptcy filers had student loans that totaled more than 50 percent of their annual income, compared with 5.4 percent in 2005.

To me, this statistic indicates that in the last ten years, student loan debt has become a major factor in bankruptcies.  And, somewhat terrifyingly, it means that 16% of bankruptcy filers are doing so knowing that they can’t discharge a debt that is eating up over half their income!

*Judge Easterbrook is a renowned conservative judge on the Seventh Circuit.

** Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir.1987).


Disclaimer: THIS IS NOT LEGAL ADVICE!!!!  I’m not a bankruptcy lawyer, and I don’t litigate student loans lawsuits, or anything related.  In sum: #1 I couldn’t offer competent legal advice on this even if I wanted to and #2 I don’t want to and am not offering legal advice.  Lawyer hat is off, blogger hat is on. So don’t rely on anything I say in these columns to make decisions about your own life – but DO think of these as conversation starters on interesting topics.