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Student Loans can be Discharged in Chapter 7 Bankruptcy - The Brunner Test

For years, it has been conventional wisdom that a student loan could not be discharged in bankruptcy. The Bankruptcy Code states that a student loan could not be discharged in bankruptcy unless the debtor shows that it would cause “undue hardship” to except it from discharge. But the standard for showing “undue hardship” was so high that the majority of bankruptcy petitioners believed they could not meet it. A recent decision out of the United States Bankruptcy Court of the Southern District of New York, In re Rosenberg (Adv. No. 18-09023) is changing this belief.

In Re Brunner, 831 F.2d 395, 396 (2d Cir. 1987) sets forth the test under which a student loan could be discharged as an undue hardship.

The Brunner test is a three (3) prong test, as follows:

  1. the debtor cannot maintain, based on his current income and expenses, a minimal standard of living for himself and his dependants if forced to repay the loans;
  2. that additional circumstances exist that indicate 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 loan.

The problem with the Brunner test is that it set too high of a burden for debtors to meet. However, as the Rosenberg Court discussed, this high burden was a myth created over the years by Court interpretations.

“The harsh results that often are associated with Brunner are actually the result of cases interpreting Brunner. Over the past 32 years, many cases have pinned on Brunner punitive standards that are not contained therein”.

The Rosenberg Court then proceeded to “apply the Brunner test as it was originally intended”. In other words, the Rosenberg Court simply applied the three prongs of the Brunner test to determine whether the student loan could be discharged as an undue hardship.

The upshot of applying the Brunner test the way it is supposed to be applied is that most student loans are dischargeable in Chapter 7.

When a debtor files for Chapter 7 Bankruptcy, he has to file a budget with the Court indicating his current income and reasonable monthly living expenses. This budget cannot include monthly student loan payments as a expense. Almost always, that budget will show little or no money left over at the end of the month. If the debtor had money left over, he would not qualify for Chapter 7 bankruptcy. And if he has no money left over, thereby qualifying for Chapter 7, then he cannot afford to repay the student loan. In such circumstances, if “forced” to repay the student loan, he cannot maintain a minimal standard of living. The majority of Chapter 7 debtors can easily meet the first prong of the Brunner test.

The second prong of Brunner mandates that the state of affairs causing the debtor to be unable to repay the loans is likely to persist for a significant portion of the repayment period of the student loans. Usually, by the time the debtor meets with a bankruptcy attorney, he is in default on his student loans. As such, his student loans are currently due and payable in full. The repayment period has ended. If the debtor can prove that he cannot immediately pay the student loans in full out of his current income, then he meets the second prong of the Brunner test.

The third and final prong of the Brunner test looks to whether the debtor has made a good faith effort to repay his student loan prior to filing bankruptcy. If he has made payments on it in the past, then he meets the third prong of the Brunner test.

Please contact the Law Offices of Joseph L. Grima & Assoc. P.C. at (313)417-8422 so that we may discuss whether your student loan can be discharged in bankruptcy.

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