How to Prove Undue Hardship For Student Loans

To prove undue hardship, you’ll likely need to pass the challenging Brunner Test by showing you can’t maintain a minimal standard of living while repaying your student loan debt.

Many borrowers who file bankruptcy wrongly assume that student loan debt is impossible to get rid of. The reality is that federal and private student loans can be canceled in bankruptcy if the borrower shows that paying them off would impose an undue hardship. Proving undue hardship has traditionally been difficult. But bankruptcy judges have begun taking a fresh look at this standard and how to apply it to borrowers in need of a lifeline.

Ahead, discover how to prove undue hardship for student loans, including a list of factors courts have looked at when agreeing to discharge education debt.

Meet the Expert: Stanley Tate is a lawyer based in Kansas City that’s helped dozens of borrowers since 2014 file student loan bankruptcy cases across the United States.

Federal law makes it extremely challenging for people to cancel student loans using bankruptcy. Despite many amendments, Congress never defined undue hardship. As a result, courts needed to develop their own definition. Most courts adopted the Brunner test, which originated from a 1987 case in which Marie Brunner attempted to discharge her student loan debt less than a year after completing a master’s degree.

To stop debtors from rushing to bankruptcy court soon after graduating to wipe away their student debt, the court laid out a three-pronged test to gauge a borrower’s hardship. Under the Brunner Test, Borrowers must prove:

• Their current income and expenses prevent them from maintaining a minimal standard of living if they have to repay the debt.

• Their financial situation is likely to persist for a significant part of the repayment period, forcing the judge to predict their future.

• They made a good-faith effort to pay the loan by trying to increase their income and minimize their expenses.

A handful of other courts, mainly in the Eighth Circuit, found the Brunner Test too restrictive and instead adopted the more flexible totality-of-the-circumstances test. Under this standard, courts consider a borrower’s:

• past, present, and future financial resources

• reasonable living expenses

• other relevant factors related to bankruptcy proceedings

Since lawmakers never defined what debtors had to do to prove their financial hardship was undue, federal courts have spent years struggling to do it themselves using different tests. Ultimately, what qualifies as undue hardship for student loans shifts depending on the judge your case is in front of, your financial situation, and the efforts you’ve made to repay your loans before seeking debt relief in bankruptcy.

• Step 1 – File Bankruptcy. Before filing a student loan bankruptcy case, you have to file a bankruptcy case. Most borrowers will file Chapter 7 bankruptcy or Chapter 13 bankruptcy. The right type of bankruptcy for you depends primarily on your household income and assets (equity in a home, savings, etc.).

• Step 2 – Gather evidence. You’re not required to try to cancel your loans before your bankruptcy case ends. You can file the paperwork after you get your bankruptcy discharge. So take your time and gather all the available evidence to prove you have an undue hardship to the court. More on what evidence to look for below.

• Step 3 – Draft the complaint. The complaint is a simple statement describing the debt you owe and who you owe it to, explaining the harm the debt causes you (undue hardship), showing that the court has jurisdiction, and asking the court to order relief.

• Step 4- File the adversary proceeding. The AP consists of the complaint and an adversary cover sheet. You’ll file both documents with the court. Once received, the court will issue a summons that you’ll need to provide to the loan holder along with a copy of the complaint.

• Step 5 – Litigate the case. The fight truly begins after the attorney for the lender or student loan servicer responds to the lawsuit. Over the next several weeks and months, you’ll exchange discovery, make court appearances, file motions, assess the merits of the case, and, possibly, have a trial. During this time, the parties can decide to settle and dismiss the lawsuit.

Although federal law has made it far more difficult for borrowers to eliminate student loans in bankruptcy, there are certain things courts routinely look at when reviewing undue hardship cases.

• Do you have federal student loans or private student loans? Federal loans are more challenging to discharge than private loans because they offer income-driven repayment plans. Private lenders typically don’t provide the same type of plans. This is why filing bankruptcy on private student loans is often easier.

• What’s the interest rate? Calculate the daily interest rate of the loan. You want to show the court how much your loan balance will grow by each month to help illustrate how even if you increased your income, you still couldn’t make a dent in the balance.

• How long is the repayment period? Your inability to repay your loans must last for a significant portion of the repayment period of the student loans. Federal Consolidation Loans are paid over 25 years. Private student loans typically have much shorter repayment periods (10 years.)

• What student loan repayment plans does your lender offer? Private lenders typically lack affordable payment options, making it easier to argue you can’t repay the debt while maintaining a minimal standard of living.

• Are you eligible for loan forgiveness programs? Public service workers will find it challenging to convince a court their student loans are an undue hardship when they qualify for loan forgiveness after 10 years of payments.

• How much student debt do you owe? The more student loan debt you have, often, the better.

• What are your annual earnings since you started working? You have the burden of proof to show your past income has left you unable to pay your student loans. I look at my client’s last five years of tax returns and W-2s to see how much they’ve earned on average. I also have them pull their Non-Certified Detailed Earnings Record from the Social Security Administration. The record shows their earnings since they started working.

• What’s your current monthly income? It’s hard to argue you should get a student loan discharge when your current income is $8 thousand/month. While you don’t need to earn near the poverty level, having a lower income is more helpful than a higher income.

• What are your current monthly expenses? One of the first things the bankruptcy court will look at is whether you can afford to repay your student loan debt while maintaining a minimal standard of living. Look at your monthly expenses for the past 12 months. What cuts can you make?

• 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 a part-time job is fantastic.

• Are you receiving Social Security Benefits? A permanent disability may allow you to get a disability discharge of your federal loans. It also can help you get a full or partial discharge of your private student loan debt.

• Are you married? Even if they have nothing to do with your loans, your partner’s income will affect your ability to get a discharge.

• Do you have children? Younger children require support (financial and time) for a significant portion of the repayment period, making it easier to prove that your financial inability will persist into the future.

• Are you or your dependents disabled? Disabilities that negatively affect your ability to work increase your chances of getting a discharge. But if your physical or mental disability is permanent and severe, consider applying for a disability discharge.

• How many student loan payments have you made? The more monthly 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?

There are four possible outcomes for undue hardship cases.

• Full discharge. The judge or the lender agrees that you’ve met your burden of proof and will wipe out all of your education debt.

• Partial discharge. The judge decides you can repay some but not all of your loans while maintaining a minimal standard of living. You remain responsible for paying the remaining balance.

• No discharge. You fail to pass the undue hardship test and owe the entire loan balance. However, the court could decide to use its equitable powers to lower your interest rate or cancel your tax liability if your loans are forgiven after making enough payments.

• Settlement. Your lender agrees to reduce the balance owed on the loans. The settlement could be for a lump sum, monthly payments, or a combination of the two.

Over the years, lawmakers have tried to change the legal standard to allow debtors to cancel student loans like other debt.

• 2015 – President Barack Obama directed the U.S. Department of Education to “issue information highlighting factors the courts have used in their determination of undue hardship,” with hopes to help the Department of Justice determine whether to challenge discharge cases.

• 2018 – The Higher Ed Act of 2018 sought to expand the definition of undue hardship and make meeting the legal standard more attainable for more student loan borrowers.

• 2019 – Sen. Dick Durbin (D. Illinois) and Rep. Jerrold Nadler (D. New York) introduced the Student Borrower Bankruptcy Relief Act of 2019. Rep. John Katko (R. New York) introduced the Discharge Student Loans in Bankruptcy Act of 2019.

• 2020 – The House Judiciary Committee introduced the Consumer Bankruptcy Reform Act of 2020 to make student loan discharge easier to accomplish.

• 2021 – Senate Democrats released the Medical Bankruptcy Fairness Act of 2021, which would allow borrowers to discharge their student loans without having to prove undue hardship. The bill would amend the U.S. Bankruptcy Code to remove the section that treats student loan debt differently from other dischargeable consumer debts. Read more about student loans as consumer debts.

• 2021 – Sen. Durbin and Sen. John Cornyn (R. Texas) introduced the Fresh Start Through Bankruptcy Act of 2021. The bipartisan bill would allow federal student loans to be discharged without proof of undue hardship once borrowers have been in repayment for 10 years.

If meeting the legal standard for undue hardship isn’t realistic for you, other options could give you some relief.

• Refinance. If you have a blemish-free credit report, good credit score, and enough income to cover your other debt payments, refinancing student loans for a lower interest rate and longer repayment term may be an option.

• Income-driven repayment. All borrowers with federal student loans, even those with Parent PLUS Loans, can request an affordable monthly payment tied to their discretionary income.

• Forgiveness. Each IDR plan will cancel your remaining balance after you make at least 240 monthly payments. The Department of Education has other programs that will wipe out your loans if you attended a fraudulent school, suffered a severe and permanent physical or mental disability, or worked full-time in public service.

There are a lot of steps to successfully file a student loan bankruptcy case. It makes sense to speak with a lawyer with knowledge of bankruptcy law and student loans to assess your chances of proving undue hardship. Since 2014, I’ve helped dozens of borrowers across the United States file adversary proceedings to prove undue hardship.

Schedule a call with me today. We’ll work together to determine the best strategy to deal with your student loans inside and outside of bankruptcy.

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