Discharging student loans in bankruptcy has always been fairly difficult. But if you live in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, or Washington, a recent decision by the Ninth Circuit Court of Appeals may make it slightly easier for you to get rid of your student loans in bankruptcy.
(To learn more about discharging student loans in bankruptcy and the Brunner test, visit our Student Loans and Bankruptcy topic area.)
Discharging Student Loans in Bankruptcy: The Brunner Test
In order to wipe out student loans in bankruptcy, you must prove to the court that paying them would cause you undue hardship. In the Ninth Circuit, the bankruptcy courts follow the Brunner test in determining if a bankruptcy filer has met the undue hardship standard. The states in the Ninth Circuit, which must use this test, include Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.
Under the Brunner test, a bankruptcy filer must meet all three of these elements:
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.
(To learn more how this works in the Ninth Circuit, see Discharging Student Loans in Bankruptcy: The Western States.)
The Hedlund Case
In a recent case, Hedlund v. Educational Resources Institute Inc., 718 F.3d 848 (9th Cir. 2013), the Ninth Circuit Court of Appeals applied what some believe is a more liberal approach to some of the Brunner elements. This may make it slightly easier for some bankruptcy debtors to get rid of their student loans.
The Facts of the Hedlund Case
In Hedlund, the Ninth Circuit considered partial discharge ($55,000 out of $85,000) of Mr. Hedlund’s Stafford student loans.
Mr. Hedlund, who was thirty-three at the time he filed for bankruptcy, had graduated from law school but failed the bar exam twice. He was working as a probation officer at the maximum salary he could earn. He was married with one child and his wife worked only one day per week. Although the Hedlunds had a few extras like cell phones, Internet, and cable, they had always lived very frugally. He went into default on his loans, and the lender garnished his salary for four years (he did not challenge the garnishment).
Mr. Hedlund looked into federal repayment plans but concluded that he was not eligible, without further investigation. He did apply to consolidate his loans, but did not reapply when the loan servicer lost the paperwork. He eventually filed for bankruptcy and sought discharge of his student loans.
The bankruptcy court discharged $55,000 of Mr. Hedlund’s loans. In upholding the bankruptcy court’s decision that Mr. Hedlund had met the undue hardship standard, the Ninth Circuit cited his efforts to obtain employment, maximize income, and minimize his expenses.
More Liberal Interpretation of the Brunner Elements
In the Hedlund case, the Ninth Circuit made some interesting decisions on certain facts that may help other debtors in the future. Those include:
- a spouse’s unwillingness to work full time cannot count against the good faith of the borrower
- discharging only a portion of the student loans is possible
- expenses that are more than bare bones (for example, for cell phones and cable service) do not necessarily indicate a lack of good faith, as long as they are a marginal part of the borrower’s overall financial picture, and
- a borrower can show a good faith attempt to repay even with less-than-diligent efforts to explore repayment options.
The Ninth Circuit is not alone in applying a slightly more liberal interpretation to the Brunner test than courts have in the past. The Seventh Circuit Court of Appeals did so in a recent case as well. (To learn more about that case, see Discharging Student Loans in Bankruptcy in Indiana, Illinois, and Wisconsin.) If you are considering bankruptcy and have student loan debt, talk to a knowledgeable bankruptcy attorney to get an assessment of your chance of discharging those loans.