In order to wipe out student loans in bankruptcy, you must prove to the court that paying them would cause you undue hardship. The definition of undue hardship varies by state, but most bankruptcy courts follow the Brunner test. Meeting the criteria of the Brunner test is difficult, but in the spring of 2013 the Seventh Circuit Court of Appeals interpreted one aspect of the Brunner test in a way that might make it slightly easier for some borrowers to discharge student loans in bankruptcy.
If you live in Indiana, Illinois, and Wisconsin, the Seventh Circuit’s view of the Brunner test applies to you.
(To learn more about discharging student loans in bankruptcy and the Brunner test, visit our Student Loans and Bankruptcy topic area.)
The Brunner Test
In most states, student loan borrowers must prove undue hardship by meeting all three prongs on the Brunner test. These three elements are:
Cannot maintain a minimal standard of living. If forced to repay the student loan, the borrower cannot maintain, based on current income and expenses, a minimal standard of living for his or her family. If you have federal student loans, the court will consider your eligibility for repayment plans —which are quite generous for low-income borrowers—in calculating the true cost of repayment. (For more information on federal loan repayment plan, see the articles in our Options for Repaying Student Loans topic area.)
Borrowers of private student loans do not qualify for the federal repayment programs, which means they have fewer repayment options and often have an easier time proving this element.
Situation will continue. This situation is likely to continue for most of the repayment period.
Good faith effort to repay. The borrower made a good faith effort to repay the loans. Again, for federal loan borrowers, the borrower’s use of available federal repayment plans is taken into account in assessing “good faith.” Private loan borrowers will have an easier time proving this element because they do not have access to generous repayment plans.
Recent Seventh Circuit Ruling on the Brunner Test
In a recent case, the Seventh Circuit Court of Appeals made it easier for some student loan debtors to meet the three elements of the Brunner test.
In that case, Krieger v. Educational Credit Management Corp., 713 F.3d 882 (7th Cir. 2013), the court considered whether a 53-year-old woman with a paralegal certificate could discharge $25,000 in student loans. Ms. Krieger lived in a rural area with her 75-year-old mother. Her only income was government assistance and she had applied for 200 jobs over ten years without success.
The bankruptcy trial court found that Ms. Krieger had made a good faith effort to repay her loans, even though she had not applied for a federal repayment plan. Under such a repayment plan, her payments would have been zero and her loan discharged after 25 years.
New Thinking on Good Faith?
This case is notable because of the Seventh Circuit’s conclusion that a failure to use an available federal student loan repayment plan does not necessarily mean the debtor fails the good faith element of the Brunner test. In this particular case, the court found Ms. Krieger’s age and lack of success in the job market over a decade to be very important in demonstrating undue hardship.
What Does This Mean for You?
If you live in Indiana, Illinois, or Wisconsin and otherwise meet the elements of the Brunner test, you may be able to wipe out your student loans in bankruptcy even if you have not applied for one of the federal student loan repayment plans. Of course, meeting the other prongs of the test can still be very difficult. Consult with a competent local bankruptcy attorney for an evaluation of your chances.