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Student Loans and Bankruptcy, Part 2 – What Is an “Undue Hardship or Hardship Discharge”?

MINOLTA DIGITAL CAMERAThe graduation season is upon us, and newly-minted high school and college graduates throughout the Los Angeles area are celebrating and pondering their futures. Student loans give people a chance to get a good education, but those loans may be with the students for years, even decades. In the event of financial troubles, federal law strictly limits when a bankruptcy court may discharge student loan debt. People planning for their education should consider these factors now, because while times may be difficult for someone to need bankruptcy protection, they must be unbearable to qualify for the discharge of student loans. We previously addressed the laws limiting student loans’ dischargeability, and now will examine the standards debtors must meet.

“Undue Hardship” and the Brunner Test

Federal bankruptcy law does not allow the discharge of student loan debt unless the debtor can show “undue hardship.” 11 U.S.C. § 523(a)(8). Most courts, including those in California, have adopted a three-part test, known as the Brunner test, to determine if a debtor meets this requirement. First, the debtor must show an inability to maintain a “minimal standard of living…if forced to repay the loans” at current income and expense levels. In re Pena, 155 F.3d 1108, 1111 (9th Cir. 1998), quoting In re Brunner, 831 F.2d 395 (2nd Cir. 1987). Next, the debtor must prove the existence of other factors that make repayment essentially impossible for some time. Id. Finally, the debtor must prove that they have made “good faith efforts” towards repayment. Id.

“Certainty of Hopelessness”

A recent ruling by the Seventh Circuit Court of Appeals affirmed that the crux of the Brunner test is the “certainty of hopelessness.” Krieger v. Educational Credit Management Corp., No. 12-3592, slip op. at 6 (7th Cir., Apr. 10, 2013), quoting In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993). The debtor in Krieger made payments on her loans for eleven years, but had reached a point where further payment was impossible. Krieger slip op. at 4. The 53 year-old debtor, who had not worked since 1986, lived with her 75 year-old mother in a rural community with few job prospects and no internet access. The two lived on meager monthly government assistance, and the debtor lacked the resources to travel to search for a job. The creditor conceded that she met the first part of the Brunner test. The Seventh Circuit considered her inability to travel and lack of job opportunities sufficient for the second part of the test, and her eleven years of payments enough to meet the third.

Partial Discharge of Student Loan Debt

If a court finds that a debtor meets the “undue hardship” test, it may discharge only part of the debt, leaving a portion that the debtor must still repay. In re Saxman, 325 F.3d 1168, 1173 (9th Cir. 2003). The Ninth Circuit considered a case that left a debtor with a $68 monthly payment on the undischarged portion, based on the bankruptcy court’s finding that a monthly 401(k) contribution of $68 was not “reasonably necessary” to the debtor’s “minimal standard of living” under Brunner. In re Craig, 579 F.3d 1040, 1043 (9th Cir. 2009). The court noted that courts have the authority to discharge student loan debt only partially, but remanded the case for a more thorough analysis of whether the 401(k) contribution was “necessary.” Id. at 1047.

For more than fifteen years, bankruptcy attorney Devin Sawdayi has helped people in the Los Angeles area restructure or discharge their debts and get a fresh start. We are committed to representing individuals coping with personal bankruptcy with respect and dignity, finding a way to address each client’s unique circumstances. Contact us today online or at (310) 475-9399 for a free and confidential consultation.

More Blog Posts:

A Chapter 13 Bankruptcy Can Help You With Your Large Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, May 21, 2013

Photo credit: By Matthewcieplak (University of Southern California Springfest in April 2005) [Public domain], via Wikimedia Commons.