Bankruptcy courts in all but one circuit rely on the so-called three-part Brunner test for determining whether a student loan is dischargeable in bankruptcy based on a claim of undue hardship.  This test is based on a thirty-year old U.S. Court of Appeals decision (Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987]) and requires a debtor to prove:

(1) That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and dependents if forced to pay off student 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 has made good faith efforts to repay the loans.

It is worth reviewing the actual circumstances of the Brunner case, as they differ significantly from those attending a student debtor attempting to obtain a bankruptcy discharge in the wake of the 2005 Bankruptcy Reform Act. In 1983, when Marie Brunner filed for bankruptcy, student loans became dischargeable on the same terms as other unsecured debt five years after the first payment became due. At that time Congress deemed this to be a sufficient waiting period to discourage student debtors from using bankruptcy to avoid an obligation they would subsequently be able to repay. Brunner filed for bankruptcy within a year of obtaining a Masters Degree in Social Work.  At the time she was unemployed, but was in good physical health and had no dependents. Indebtedness totaled $9,000, which would have fully amortized over ten years at $102 a month at 6% interest.  Brunner had made no payments whatsoever on the loan but had purchased a used car for $2400 cash two months prior to filing for bankruptcy.

Since the Brunner decision, undue hardship has become the only criterion for discharge of student loans in bankruptcy, and court interpretations of the three prongs have become increasingly stringent. Some courts interpret a ‘minimal’ standard of living as the federal poverty level, even though it is acknowledged that in most urban areas a person whose income is below 150% of poverty level requires government subsidies (section 8 housing, Medicaid) to satisfy the most elementary needs of human existence. When the debtor has exhausted all possibilities for legally increasing his income, and has pared his expenses to the point where any further reduction would leave him homeless, without access to needed medical care, without transportation, or without the tools and supplies needed to generate self-employment income, and still cannot pay the interest on student loans, he is in precisely the sort of bind bankruptcy law at its most basic was intended to cure, yet, at least in the eyes of the student loan industry, this is still not “undue hardship.”

The average student loan indebtedness is now $40,000, with many individuals owing amounts comparable to home mortgages, amortizing over thirty years with monthly payments in excess of $1000. The likelihood that ill health, unemployment, or unanticipated dependent expenses making repayment at this rate unsustainable over the course of a thirty year period will occur is quite high.  Lenders are responding by challenging cases of real distress, requiring debtors with essentially no resources to jump through more and more hoops to prove that they are really disabled and unable to work. As the work force ages and people approach retirement with a substantial chunk of student loans still outstanding, lenders and debtors are on a collision course. It is impossible to collect a debt based on the future earning power of an insolvent person who has died. Too rigorous enforcement of prong 2 of the Brunner rule at the present time simply defers the inevitable, and whatever funds the system succeeds in squeezing out of the increasingly desperate debtor go into the pockets of the lenders as fees and interest, leaving the principal of the loan as an unpaid government guaranteed obligation.

Under good faith efforts to repay loans, the court in the Brunner case looked at efforts to increase income and evidence of unnecessary expenditures during periods when income might have allowed loan repayments to be made. Debtors contemplating asking for a hardship discharge would do well to review recent bankruptcy cases for the range of expenditures considered subordinate to that all-important student loan payment. They might be surprised, for example, to learn that they could have made do with a five year old glasses prescription, and that life insurance, unless court-ordered, is a luxury. Refusal of income-contingent repayment plans has also been argued as evidence of lack of good faith. Except as a temporary expedient, income-contingent repayment plans only deepen the hole in which the student debtor finds him- or herself.

Unless or until Congress revises the bankruptcy statutes, we are stuck with the Brunner rule; however, we are not stuck with loan company and servicer use of it as an impenetrable barrier to discharge in cases of genuine hardship, rather than as a rigorous tool for distinguishing between debtors who are using the system and debtors who are being used by it.