Student Loan Debt and Bankruptcy – What Is Undue Hardship? Skip to main content

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Student Loan Debt and Bankruptcy – What Is Undue Hardship?


College debt

Student loans and bankruptcy - undue hardship is key

Image Source: Cole Keister on Unsplash

There’s a prevailing myth that student loans cannot be discharged in bankruptcy. That’s not true. What is true is that you have to take additional steps to ask for student loan relief during bankruptcy – it's not automatically included in your petition. The key to most successful student loan bankruptcy cases is proving “undue hardship.” Today we take a look at what this phrase means and what you need to do to pursue student loan relief in bankruptcy.

Undue Hardship Defined

This area of bankruptcy law is complex and often frustrating. Federal bankruptcy law allows for the discharge of federal student loans in bankruptcy if the debtor can demonstrate that requiring repayment would cause undue hardship. The problem is that the law doesn’t bother to define what establishes undue hardship. Because the term is vague, judges have interpreted the language of the law and set precedents. One of the most common interpretations is called the Brunner Test.

The Brunner Test has three prongs. The first is whether you can keep up a reasonable standard of living if you are forced to repay your student loans. The second is whether or not your financial problems are short-term or a permanent situation. The third is whether you made a good faith attempt to pay your student loans. In most courts, the Brunner Test was the gold standard, but a more recent decision in the Roth case advanced the notion that the Brunner Test is outdated given the 30-year gap since it began.

Courts Pushing Back on Brunner Test 

There are two types of bankruptcy law – case law and codified law. Law that is passed by Congress is codified law. That includes much of the federal bankruptcy laws. The other type of law is case law. Case law is made when a codified law is vague or debated, and the court must interpret the intent of the law. When judges make case law, it applies to their jurisdiction. If it goes to appeal, that can widen the scope of the ruling to a region, state, or the whole US if it makes it to the Supreme Court.

When the Brunner Test became case law back in the early 80s, student loan borrowing was not the crisis that it is now. That’s why many courts are now more open to expanding the interpretation of undue hardship beyond the rigid (and potentially unfair) confines of the Brunner Test. In many cases, bankruptcy filers can meet two of the three prongs, but not all and they are denied relief when they truly cannot afford their student loans.

Most Consumers Don't Ask for Relief 

The biggest obstacle to getting relief from student loans in bankruptcy is asking for it. In 99% of bankruptcy cases where the filer also has student loans, they don’t take the extra step required. Other debts can be included in the standard petition including credit cards, medical bills, old income taxes, and more. But federal student loans cannot. Those most go into a separate action called an adversary proceeding. This is a suit that sues the loan issuer for relief.

It costs a little more to tack this onto your bankruptcy case because it’s extra work for the lawyer, but it can be well worth it if you can get student loan relief. A study showed that an average 40% of adversary proceedings produce relief of some or all of federal student loans. It’s also important that you choose an attorney experienced with adversary proceedings and student loans. Check out reviews from our satisfied clients and then contact the Law Offices of John T. Orcutt at +1-919-646-2654 for a free bankruptcy consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.





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