Student loans are typically not discharged in bankruptcy. It is difficult, but not impossible, to discharge such debts if you can show that payment of the debt “will impose an undue hardship on you and your dependents.” See 11 U.S.C. § 523(a)(8). Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy process. As a debtor, you must file a lawsuit, called an adversary proceeding, which will prompt the bankruptcy court to decide the issue.
Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test, which requires a showing that (1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; (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) the debtor has made good faith efforts to repay the loans. Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).
The difficulty of discharging student loan debt in the Sixth Circuit is underscored by this recent opinion. In this case, after filing a voluntary Chapter 7 petition, the debtor initiated an adversary proceeding, seeking discharge of her student loans. The creditors who held the student loans vigorously opposed the adversary proceeding. The adversary proceeding went to trial – complete with witnesses and exhibits – and the debtor lost. In finding that this particular debtor did not satisfy the Brunner test, the court engaged in a detailed analysis of the debtor’s financial situation and job prospects. This recent opinion confirms that, at least in the Sixth Circuit, a debtor will not be able to discharge student loans if they have even a possibility of improving their financial situation. In this case, the debtor was a single mother of four who had not been employed since September 2008. However, the court essentially found that because she was healthy and apparently employable, her outlook was not sufficiently bleak to pass the Brunnertest.
If you are considering bankruptcy, and are hoping to discharge student loans, talk to an experienced bankruptcy attorney in your jurisdiction. While these kind of debts are only dischargeable in very limited circumstances, a bankruptcy attorney will be able to help you determine whether your case might fit within one of the narrow exceptions.