As we discussed in this post about the discharge of student (or educational) loans, most courts apply some version of the Brunner Test in determining whether a student loan should be discharged because of undue hardship. The Brunner Test is named after a 1987 case in the Second Circuit Court of Appeals, Brunner v. New York State Higher Educ. Servs. Corp.), 831 F.2d 395, 396 (2d Cir. 1987)). Because the Bankruptcy Code only references discharges based on “undue hardship,” without actually defining the term, courts had to come up with a test and Brunner fit the bill. Bankruptcy Courts in Georgia, Florida and Alabama use this test. What does this mean to you in the real world? Let’s review the three prongs of the test.
- The borrower cannot maintain a minimal standard of living if they were forced to repay the student loans. The Court will review your income and expenses to determine whether you can pay for basic housing, utilities, groceries, insurance and transportation for yourself and dependents. Basic may not include cable/satellite, both landline and cell phones, organic groceries, etc. Can anything be cut from the budget to find another $50-100? If so, that is money that could be paid on the loans.
- Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Some courts bluntly state that undue hardship requires a “certainty of hopelessness.” Many borrowers facing financial difficulties (in fact, most people filing Chapter 7) can meet the first test due to unemployment, disability or other current problems. The second prong means that this situation will persist for the repayment period of the loan (usually many years). Often, this involves a long term disability or other factors that will limit the ability to find a job in the future or find a higher paying job. It may involve showing that training in another industry is not possible. It is simply not usually sufficient to show that one is unemployed at the time or that a short-term health issue is going to limit employment for the time being.
- The borrower has made good faith efforts to repay the loans. Bankruptcy law includes a “good faith” test throughout the process and the discharge of student loans is no different. Even if a borrower meets the first two prongs above, the Court will review the history of the loan to determine whether the borrower has made a good faith effort to pay the loans when they were able. If a borrower defaulted on the loan even when they were able to make payments, did not seek forbearances, or did not seek modifications, the Court may find that a good faith effort was not made. Has the borrower reduced expenses in the past to try to make loan payments? This final prong may also act against younger borrowers who do not yet have a history of repayment (although younger borrowers are also less likely to meet the second prong of the test).
It is important to note that each of these elements are entirely dependent on the specific facts of each case. There is no set budget for everyone, and no set standards for showing “good faith” attempts to repay. The only way to determine whether a particular borrower is eligible for a discharge is to take a hard look at all circumstances and apply the above tests. It is also important to find a good lawyer who is familiar with the rulings of Bankruptcy Courts in your state and district. Because there is no bright line test, Judges have a lot of discretion and in reality, some Judges are more debtor-friendly than others. If you are in Georgia, contact us for a review. If you are in another state, look for a good lawyer in your area.