Wiping out student loans in Chapter 7 or Chapter 13 bankruptcy is not always easy. If you want to discharge student loans in bankruptcy and you live in Alaska, Arizona, California, Idaho, Montana, Nevada, Oregon, or Washington you’ll need to understand the Brunner test and also the additional factors that courts in the Ninth Circuit Court of Appeals may consider in your case.
Read to learn about discharging student loans in bankruptcy in general, and the specific standard used in the Ninth Circuit.
Discharging Student Loans in Bankruptcy: Undue Hardship and the Brunner Test
Under the federal bankruptcy code, you may discharge (wipe out) a student loan in bankruptcy only if you can prove that repayment would cause you undue hardship. In order to prove this, you must bring a separate action in your bankruptcy case, called a Complaint to Determine Dischargeability, and then essentially litigate the issues.
(To learn more about complaints to determine dischargeability, see Adversary Proceedings in Bankruptcy.)
Because “undue hardship” is vague, the Ninth Circuit (along with eight other circuits across the country) has adopted the Brunner test to provide more clarification as to what this means. Under the Brunner test, you can discharge your student loans only if you meet all three of the following criteria:
- Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans. A minimal standard of living is not a middle class standard, but a much lower standard of living. The courts expect you to maximize your income and minimize your expenses.
- Persistence. Your current financial situation is likely to continue for a significant part of the repayment period.
- Good faith. You have made a good faith effort to repay your student loans.
Discharging Student Loans in the Ninth Circuit: In re Nys
One of the trickiest prongs of the Brunner test is the second one -- determining whether the debtor’s financial situation is likely to continue for a large part of the repayment period. According to the Ninth Circuit, absent other evidence, it will presume that the debtor’s income will increase over time such that he or she will be able to make payments while maintaining a minimal standard of living. However, the debtor can produce additional evidence to overcome this presumption. To that end, the Ninth Circuit, in a case called Educ. Credit Management Corp. v. Nys (In re Nys), 446 F.3d 938 (9th Cir. 2006), set forth a number of additional circumstances that may be considered.
The In re Nys Additional Circumstances
Bankruptcy courts may consider the following circumstances in determining the second prong of Brunner – whether the debtor’s current financial situation is likely to continue for a significant portion of the student loan repayment period.
- Serious mental or physical disability of the debtor or the debtor's dependents which prevents employment or advancement
- The debtor's obligations to care for dependents
- Lack of, or severely limited education
- Poor quality of education
- Lack of usable or marketable job skills
- Maximized income potential in the chosen educational field, and no other more lucrative job skills
- Limited number of years remaining in the debtor's work life to allow payment of the loan
- Age or other factors that prevent retraining or relocation as a means for payment of the loan
- Lack of assets, whether or not exempt, which could be used to pay the loan
- Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor's assets and/or likely increases in the debtor's income
- Lack of better financial options elsewhere.
Courts May Consider Other Factors
The In re Nys list is not exhaustive. If a debtor has another type of evidence showing that his or her financial circumstances are not likely to change, the bankruptcy court may consider that as well.
Partial Discharge Available in the Ninth Circuit
Unlike some other areas off the country, the bankruptcy court may grant a partial discharge of your student loans in bankruptcy. It’s not necessarily an all or nothing deal.
Student Loan Discharge Cases in the Ninth Circuit
For many years, the collective wisdom was that discharging student loans was extremely difficult unless you were disabled or elderly (and therefore not likely to be able to pay the loans in the future). However, since the Nys decision in 2006, the Ninth Circuit and bankruptcy courts have allowed the discharge of student loans of debtors who were young, able-bodied, and working. In those cases, the courts often focused on factors such as:
- the debtor had reached the maximum income level available in his or her field
- the debtor lived in a rural area with no realistic opportunity to increase income
- the debtor lived very frugally
- the debtor did everything possible to minimize expenses, or
- the debtor had children with special health needs.
There is no magic formula, however. There are plenty of plenty of published cases in which the court denied the discharge of student loans, even though one of the above situations applied to the debtor.
And keep in mind that student loan lenders often aggressively fight the discharge of student loans. This means you’ll likely have to hire an attorney and pay a pretty penny in attorneys’ fees.
Other Options for Dealing With Student Loan Debt
If you can't discharge your student loans, Chapter 13 bankruptcy can provide temporary relief by allowing you to reduce your payments during your repayment period (usually between three and five years). For detailed information on how Chapter 13 can help with student loans, see Nolo's article Student Loans in Chapter 13 Bankruptcy.
If you have federal loans, you may be able to take advantage of programs offered by the Department of Education that allow for more affordable monthly payments, a temporary break from payments (forbearance), cancelling the loans in limited circumstances, and more. To learn about these programs, visit Nolo’s Student Loan Debt area.