• Ben Zaeri

Can Student Loans be Discharged in a Chapter 7 Bankruptcy?

Can Student Loans be Discharged in a Chapter 7 Bankruptcy?


You might have found yourself in a situation where you are overwhelmed with student loans that you absolutely cannot pay back, and be wondering whether a Chapter 7 Bankruptcy is the answer? Well, the answer is “it depends.” Filing a Chapter 7 Bankruptcy under certain conditions, may help to discharge your student loans. Below, I will provide you with some basic information and guidelines.


Generally, student loans cannot be discharged. However, there is a limited exception to this general rule of “undue hardship.”  If an undue hardship exists on the debtor and the debtor’s dependents, student loans may be subject to a discharge with a Chapter 7 Bankruptcy.


What does that mean?


An undue hardship exception is a little tricky, but not impossible.  To qualify for the undue hardship exception, you must prove that you are currently unable to make your payments and you will not be able to make your payments in the future.  The courts have generally favored the use of a three-prong test, the Brunner test, named after a case that laid out a three-pronged standard or guidelines for judges to use when determining whether or not they should discharge a debtor’s student loan debt. However, more recent cases have strayed away from the use of the Brunner test, and guidelines are becoming more lenient.


Undue Hardship


How do we know what constitutes an undue hardship?  If we are filing bankruptcy, don’t we have an undue hardship? It is not that simple. Congress did not provide us with a simple definition of the phrase "undue hardship," and it appears courts avoid the exact definition as well. However, evolving case law is changing that. Courts generally evaluate the unique factual situation of each debtor and make a case by case decision. This brings us to the Brunner Test.


The Brunner Test


The most popular and commonly used test was laid out by the second Circuit in Brunner v. New York State Higher Educ. Serv. Corp. The Court held that for a debtor to obtain a discharge of student loans based upon an undue hardship, the debtor must demonstrate that "(1) the debtor[s] cannot maintain, based on current income and expenses, a 'minimal' standard of living for [themselves and dependents] if forced to repay the loans; (2) that 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[s have] made good faith efforts to repay the loans."

This basically means:

  • You are not able to maintain a minimal standard of living while making payments on your student loans;

  • Your situation is not likely to improve during your loan repayment period; and

  • You have so far tried your best to repay your loan with a good-faith effort.

Thus, to measure the possibility of getting your student loan discharged in bankruptcy, you must first consider the foregoing test and analyze each prong of the test as follows: 

Minimal Standard of Living


In order to show that you are not able to maintain a minimal standard of living, you must demonstrate that despite living an extremely frugal life, you cannot afford the bare necessities of life. In this day and age, it can be difficult to evaluate bare necessities. Cable and internet are not necessities. Examples of bare necessities would be housing, food, shelter, and possibly transportation. Keep in mind that the court will also include and consider the income of each member of your household. If you and those in your household make anything in excess of what is necessary for basic survival, you are not likely to meet the minimal standard of living prong.


Nothing will ever Change


If you cannot repay your loans today, that does not mean your situation will not change tomorrow.  Sometimes, a financial hardship can be temporary. This is an important factor. The economy is not static –it is constantly changing. As the economy changes, there is opportunity for your financial hardship to change. Undue hardship exists when the hardship is not likely to ever change. While this exception was made for the protection of those plagued with tragic life altering events such as permanent disability, there could be other situations that limit opportunity for betterment. Each case is evaluated on a case by case basis. The preliminary question is whether it is likely that your financial situation will change for the better during the loan repayment period.


Good-Faith Effort


Generally, you must show a good-faith effort to repay your loan.  This usually means that you have made an effort to repay your loan for a period of time. If you consistently defer your loans, this could be problematic; however, not all courts require actual payments to meet the good-faith effort prong.


Bankruptcy Law Appears to be Changing in your Favor!


In an Eighth Circuit case, Long v. Educational Credit Management Corp., a single mother that suffered from a mental health illness obtained a discharge of her student loans.  Upon appeal, the Eighth Circuit refused the application of the Brunner test, and instead analyzed past, present and future circumstances of the debtor, reasonable and necessary living expenses, and other circumstances. In Bronsdon v. Educational Credit Management Corp., a 64-year-old woman without any disability obtained a discharge. Upon appeal, the Court held that “Brunner takes the [undue hardship] test too far” by forcing debtors to show “extraordinary circumstances.”  


What does this mean?  It appears that Courts are becoming more lenient, straying away from strict guidelines of the Brunner test, and evaluating each case individually to determine whether there is an undue hardship.


Adversary Proceeding


Filing Chapter 7 Bankruptcy is a start, but discharging student loans requires a little something more.  You must file an adversary proceeding.  This is like filing a lawsuit.  The lender is served, and then the case proceeds to a trial where evidence is presented to the court.  This is where the court uses the totality of the evidence presented and weighs it on the scale to determine whether your case qualifies as an “undue hardship.”


Let’s Sum it Up


It is possible to have student loans discharged in a Chapter 7 Bankruptcy when you have an undue hardship.  If you have an extremely unfortunate financial situation that prevents you from ever being able to meet the simple requirements for survival and repay student loans at the same time, the court might agree to discharge your student loans. Remember, you will need to provide evidence of your circumstances at a trial.  


Every case is unique, and requires careful evaluation. It is always a good idea to have an experienced Chapter 7 Bankruptcy attorney evaluate your case. Call or chat with us online for a free case evaluation.



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