In order to wipe out the Student Loans, in full or even partially, we must prove that repaying the loans would be an undue hardship.
Criteria for ‘Undue Hardship’: A Detailed Look
The term ‘undue hardship’ isn’t explicitly defined in the Bankruptcy Code, and so it’s open to interpretation by the courts despite the relaxation of the Rules, which Biden has forced the U.S. Dept of Education to adopt.
A court might agree that repaying your loans would be an ‘undue hardship’ if you can demonstrate that:
- You can’t maintain a minimal standard of living for yourself and any dependents.
- The hardship will continue throughout the loan’s repayment period.
- You sincerely tried to repay your loans before filing for bankruptcy.
‘Minimal standard of living’ is a flexible term and could involve situations where:
- Your income has been below the federal poverty level (FPL) for several years without signs of improving.
- You’re on public assistance or dependent on a family member.
- You have a debilitating mental or physical illness or permanent injury.
Additional circumstances might include:
- Having a child with a serious illness requiring round-the-clock care.
- A decrease in household income due to divorce.
- Disability checks being your only source of income.
- Depending on public assistance to support your children.
- In some cases, you may be supporting a spouse who was seriously and permanently injured in a car accident or developed a total disability.
In these scenarios, your situation is unlikely to improve in a way that would allow you to repay your debt. Moreover, your expenses, scrutinized by the bankruptcy court, should only include reasonably priced necessities, not luxuries or nonessential purchases.
Why a Lawsuit Is Necessary for Student Loan Discharge
Initially, student loans were discharged in bankruptcy just like other consumer debts. But concerns arose that high-earning professionals with expensive degrees could exploit the system.
Consequently, the rules were tightened. Borrowers had to wait at least five years from when they began making student loan payments to seek discharge, unless they could prove that the debt created an ‘undue hardship.’
Over time, the five-year window was eliminated. Now, all student loan borrowers must sue to discharge their education loans in bankruptcy. You can read more about why it’s so hard to file bankruptcy on student loans here.”
The Brunner Test: An Explanation
The Brunner Test is the one most bankruptcy judges across the nation use, named after the case that created it — Brunner v. New York State Higher Education Services. It sets a high bar that few bankruptcy filers clear.
To have your student loans discharged using this test, you must prove three things:
1. Current income: Based on your current income, you can’t maintain a minimal standard of living for yourself and your dependents while making your monthly payments.
2. Financial situation: Your financial situation is likely to persist throughout the student loan repayment period.
3. Good-faith effort: You made a good-faith effort to repay the loans.
The Totality of Circumstances Test: What It Means
Some courts use this more flexible standard, but not here in Illinois. It allows judges to consider all relevant facts and circumstances of your financial situation. Despite being considered more lenient, few people can overcome this test and get a fresh start.
Many filers fail these tests because they cannot sufficiently demonstrate the severity of their financial situation and their efforts to improve it. Others don’t pass because the tests are inherently challenging, no matter the effort.
Our Chicago Student Loans bankruptcy lawyer has helped clients dealing with student loan discharge issues. Schedule a free consultation and learn about different options.