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Discharging Student Loans under Brunner & Helpful Alternatives in Bankruptcy

Posted on: January 13th, 2014 by Charles Faquin No Comments

Discharging student loans in bankruptcy is not a simple task. From the start, the odds are stacked against an insolvent debtor. He or she must prove by a preponderance of the evidence that repaying the debts would cause the debtor “undue hardship,” which is a term used (but not defined!) in the Bankruptcy Code, 11 U.S.C. § 523(a)(8). The seminal case that established the widely accepted test to determine “undue hardship” is Brunner v. N.Y. Higher Educ. Serv. Corp., 397 F.3d 382 (6th Cir. 2005). There, the Second Circuit Court of Appeals established a three pronged test, commonly known as the Brunner Test, to determine whether a particular debtor meets the standard of undue hardship required for discharging student loans.
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The Brunner Test is as follows:
(1) If the debtor has to repay the debt, it will prevent the debtor and his/her dependents from maintaining a minimum standard of living;
(2) The minimum standard of living will last or is expected to last for a substantial portion of the repayment period;
(3) The debtor has made a “good faith effort” to repay the loans. Id.

In Tennessee, bankruptcy courts apply the same Brunner Test, which was adopted by the Sixth Circuit Court of Appeals in Oyler v. ECMC as the standard for proving “undue hardship.” 397 F.3d 382 (6th Cir. 2005)

Assuming the debtor has the ability to meet each requirement under the Brunner Test, additional hurdles exist outside of the stringent case law. The debtor must file an adversary proceeding against the student loan creditor to obtain an order discharging student loans. This usually means that the insolvent debtor must have the ability to pay an attorney to pursue this lawsuit during the bankruptcy case. Even if the lawsuit is successful, there is no case law or statute that provides for the recovery of attorney’s fees if the case is successful – meaning that the debtor could be on the hook for thousands of dollars even if the case is won.

Even if a debtor does not meet the Brunner Test, bankruptcy can still provide the student loan debtor relief. In a Chapter 7, certain other kinds of debt may be discharged – allowing the debtor to focus on paying off student loans after their case is closed. Alternatively, in a Chapter 13, the student loans can be placed in a repayment plan where the monthly payment amount is based on the debtor’s ability to repay the debts based on monthly income and expenses.