Effect of Bankruptcy on Student Loans

Since the changes to the Bankruptcy Code made under the Bankruptcy Abuse Prevention and Consumer Protections Act of 2005, it has generally been thought that discharging student loans in Bankruptcy is nearly impossible; however, in many circumstances that is not the case.  

In order to discharge student loan debt under the Bankruptcy Code, a debtor must show that repayment of said loans would impose an “undue hardship.” Most jurisdictions, including the Fifth and Tenth Circuit, which includes Texas and Colorado use the “Brunner Test” in order to determine if a debt causes an “undue hardship.”  

The Brunner Test requires the Debtor to show that (1) Debtor and his or her dependents would not be able to maintain a  “minimal” standard of living if forced to repay the loans, (2) Debtor’s state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and (3) Debtor has made good faith efforts to repay the loans. 

Historically, the courts have strictly construed the Brunner Test, resulting in student loans being dischargeable in only a very narrow set of circumstances, primarily applied to debtors with a severe physical or mental disability.  2  In recent cases, however, some courts have been interpreting the Brunner Test more liberally. 

For example, in Rosenberg v. Educ. Credit Mgmt. Corp., Rosenberg filed Chapter 7 Bankruptcy in 2018, in the Southern District Court of New York.  Following the filing he filed an adversary hearing in an attempt to have his student loans discharged. In 2020 the court ruled in favor of Rosenberg’s motion for summary judgment. The judge argued that the Brunner Test was being construed far too narrowly. Rosenberg began borrowing money in 1993 to pay for his undergraduate degree. After graduating, he served in the Navy for five years. Upon returning from service, Rosenberg applied for additional student loans and went to law school. After law school, Rosenberg consolidated his student loans and had an outstanding balance of $221,385.49 with a 3.38% interest rate.  

When Rosenberg filed for Chapter 7 Bankruptcy in 2018 he had a monthly income of -$1,548.74 after accounting for his monthly expenses. Rosenberg initiated an adversary proceeding requesting a discharge of his student loan debts under the theory that the loans created an “undue hardship” because he had negative income ratio that was likely to persist for the life of the loan.  In an interview published by Above the Law Rosenberg stated that he could not maintain a minimal standard of living based on his current income and expenses, that his current financial condition was likely to persist for a significant portion of the repayment period, and that he made good faith efforts to repay the loan.3 

In granting summary judgment in Rosenberg’s favor on the issue, the Court held that under the Brunner Test: (1) Rosenberg was unable to maintain a minimal standard of living because his current income and expenses resulted in total deficit of $1,548.74 at the time of filling; (2) Rosenberg’s circumstances would exist for a significant portion of the repayment period because he had defaulted, accelerating his loans, and therefore the repayment period had already ended; and (3)  Rosenberg made a good faith effort to repay the loan missing only16 payments in the almost 13 years since the student loans originated, and making ten payments during the 26 month period starting in 2015 with a income based repayment plan and account forbearance.  

Having found the requisite “undue hardship” under the Brunner Test, the court ordered that Rosenberg’s student loans be discharged. Although the holding in this case is not yet binding on other courts, as it has not yet been affirmed by a higher court, it demonstrates a changing mindset of courts with regard to the interpretation of the Brunner Test and the discharge of student loan debt in bankruptcy. 

If you are being crushed by student loan debt, despite your genuine effort to repay them, and especially if you have a mental or physical disability, it is certainly possible that your student loan debt may be eligible for discharge through bankruptcy—particularly due to the recent economic downturn brought on by the current global pandemic. If discharge is not an option in your particular circumstances, all hope is certainly not lost. Many borrowers’ federal loans will qualify for an Income Based Repayment Plan. Many of these plans, depending on your income, may result in $0.00 monthly payments.  In order to qualify, you must not be in default of your loans; however, in many cases, defaulted loans can be rehabilitated, bringing you back into eligible status.  If you have recently lost your job, or are facing economic hardship currently and have any questions regarding your student loans, do not hesitate to contact Kuiper Law Firm PLLC to discuss how we may be able to assist you.  

f you have any questions regarding this article, or its potential application to your current financial situation, please call our office. Details are found under our ‘Contact’ page.

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