A Glimmer of Hope for Discharging Student Loans in Bankruptcy?

Student Loan DebtA potential ray of hope has appeared on the horizon for the thousands of people struggling to pay their student loans. On January 21, 2015, Representative John K. Delaney (D-MD) introduced H.R. 449–Discharge of Student Loans in Bankruptcy Act (click here to read H.R. 449). This bill has been referred to the House Committee on the Judiciary.

Currently, bankruptcy law states [some] student loans can be discharged in bankruptcy if the debtor demonstrates to the court that to continue paying those loans would constitute an “undue hardship.” For most people with thousands of dollars worth of student loan debt, who are out of work, struggling to pay their mortgage/rent, put food on the table, etc…..it would seem easy to prove to a court that there is no way the debtor could afford to pay their student loans. But only if it were that easy. Since the bankruptcy code does not define “undue hardship”, bankruptcy courts have taken it upon themselves to create a test to determine “undue hardship.” Most courts have adopted the three-part Brunner Test….and this test is very difficult to pass.

The Brunner Test (Brunner v. New York State Higher Education Services Corp.) states that the debtor must prove:

1. debtor can’t maintain, based on current income and expenses, a “minimal” standard of living for herself and he dependents if forced to repay the loans; and

2. additional 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. that the debtor had made good faith efforts to repay the loan

The debtor must satisfy all three parts to receive a discharge. Most courts impose a very strict reading of the above factors. For this reason most people who attempt to discharge their student loan debt in bankruptcy, fail to do so. Perhaps H.R. 449 will provide debtors with student loan debt the opportunity to truly receive a financial “fresh start.”