Bankruptcy judges usually define undue hardship for student loans as an inability to maintain a minimum standard of living for yourself and your dependents while repaying your student loan debt. To discharge student loans, you'll first have to file a chapter 7 bankruptcy or a chapter 13 bankruptcy case.
Next, you'll have to file an adversary proceeding. The adversary proceeding is a lawsuit. In that lawsuit, you're asking the bankruptcy court for a student loan discharge due to undue hardship.
To meet the undue hardship standard, you'll need to pass either the Brunner Test or the totality-of-the-circumstances test.
Which test you'll have to pass depends on which bankruptcy court you filed your case in.
Click here to read Can you discharge student loans in bankruptcy? [A Guide]
Some members of Congress are trying to make it easier to discharge student loans in bankruptcy. Will Congress actually make those changes to bankruptcy law? 🤷♂️
How to prove undue hardship for student loan debt?
Under the Bankruptcy Code, there's no one way to prove undue hardship.
If there was, I imagine a lot more people would be seeking a bankruptcy discharge of their student loan debt.
But since that's not how it works, to win your case, you have to do the best job you can to pass the hardship test your court uses.
In bankruptcy courts that use the Brunner Test, the judge will ask 3 questions:
- Based on your current income, can you maintain a minimal standard of living for you and your dependents while repaying your student loan debt?
- Is your financial situation (state of affairs) likely to stay the same for a significant portion of the repayment period of the student loans?
- Have you made a good faith effort to repay your student loans?
The Brunner Test comes from a 2d Cir. bankruptcy case, Brunner v. New York State Higher Education Services. You can read my breakdown of those bankruptcy proceedings here.
The totality-of-the-circumstances test is slightly different.
Courts that use this test pay special attention to student loan borrowers':
- past, current, and reasonably reliable future financial resources;
- reasonable necessary living expenses; and
- any other additional circumstances and facts.
Which test is easier to prove an undue hardship claim?
I'm not really sure.
Some student loan bankruptcy attorneys say that the totality-of-the-circumstances test is easier. Some say the Brunner Test is.
Truthfully, I think it matters who your bankruptcy judge is more than anything else.
No matter which test is used, federal student loans are almost always going to be harder to discharge then private student loans.
The reason for that difference is because the US Department of Education offers income-driven repayment plans and loan forgiveness programs. Private student loan servicers don't.
Undue hardship factors for student loans
In my years of helping student loan borrowers try and get a discharge of student loan debt using the bankruptcy process, I've noticed a few common factors that make for a stronger case.
Here are some things I look for:
- Are the loans federal student loans or private student loans? Federal loans are harder to discharge than a private student loan because they offer income-driven repayment plans. Private lenders typically don't offer the same type of plans.
- Are you eligible for an income-driven repayment plan? $0-low monthly payments make passing the test hard.
- How much student debt do you owe? The more student loan debt you have, the better.
- What's your current monthly income? The lower your monthly income, the better.
- Are your financial difficulties temporary or permanent? The longer-lasting your financial hardship throughout the loan repayment period, the better.
- Do you work full-time or part-time? Full-time work is better. Full-time work plus part-time work is fantastic.
- Are you receiving Social Security?
- Are you married? Your partner's income will affect your ability to discharge your student loans.
- Do you have children? If you're 50 years or younger with small kids, that's a positive factor.
- Are you or your dependents disabled? Disabilities that negatively affect your ability to work increase your chances of getting a discharge.
- How many student loan payments have you made? The more payments you've made before filing bankruptcy, the more good faith you've shown.
- Have you used deferments/forbearances? Using deferments and forbearances shows a good faith effort to repay your debts.
- Are you upside down with your mortgage? The less equity you have to borrow against to pay your loans, the better.
- Do you have savings/retirement funds? The less money you've put towards retirement, the better.
Lastly, are there any other additional circumstances that make it incredibly difficult for you to pay back your student loans? If so, how long will that state of affairs last?
If you've already filed bankruptcy or are thinking of filing bankruptcy to deal with your student loans, speak with a lawyer that fully understands student loan law and bankruptcy law. You know, someone like me.