Since about 2000, college tuition has increased massively in most places. At the same time, banks have remained eager to lend these students lots of money, even as credit requirements elsewhere tightened. As a result, Americans now owe over $1.5 trillion in education debt. If everything goes as planned for recent graduates, paying off student loans is usually not a problem. Many people might have to put off large purchases for a few years, but that’s a price most are willing to pay.
But as we know, everything does not always go according to plan. That’s basically the reason that the United States has such a generous bankruptcy law. In most cases, the debtors simply miscalculated, and they deserve fresh starts.
Student loans are much like Small Business Association loans. The borrower needs money for a certain purpose (going to school or starting a business), a private bank makes the unsecured loan, and the federal government guarantees that loan. SBA loans are dischargeable in a Chapter 7 or other consumer bankruptcy in Minnesota. Student loans had that same status, until Congress revised the Bankruptcy Code in the late 1970s. These revisions limited Minnesota student loan discharge to cases which involved an “undue hardship” or if a student loan had become “stale” – that is, the loan had been in active repayment status for at least seven years. In 1998 Congress eliminated “stale-ness” as a basis to discharge student loans in bankruptcy – so now the only way to discharge student loans is to prove that repayment of student loans works an undue hardship. But what does undue hardship mean?
The Brunner Rule
There’s an old saying among Minnesota bankruptcy attorneys that bad facts make bad law. That was certainly the case with regard to 1987’s Brunner v New York State Higher Education Services Corporation. Unfortunately, in this instance, the “bad law” which the “bad facts” engendered lasted for decades.
Marie Brunner obtained a graduate degree in social work and left school with about $9,000 in debt. That was a lot of money in the early 1980s, but not really an eye-popping total. Moreover, Ms. Bruner declared bankruptcy almost immediately after the repayment schedule began. She apparently made no effort to make payments or obtain a temporary deferral.
The court did not like Marie Brunner. So, the judge took the opportunity to harshly set out the meaning of an “undue hardship:”
- Inability to maintain a minimal standard of living (e. above the poverty line),
- The adverse circumstances are long-lasting, and
- The borrower made a good faith effort to repay the loan.
Ms. Brunner flunked all three prongs of this test. Future courts would rule in much the same way. That second prong torpedoed many Minnesota student loan discharge requests. Some courts surmised that, simply because the debtor had a college degree, things could possibly get better for the borrower.
Totality of the Circumstances
Over the years, Brunner became less and less applicable. As mentioned, student debt in Minnesota reached epic proportions. Furthermore, most people do not rush to the bankruptcy court when things get a little rough. In fact, bankruptcy is a last resort for many people.
The forward-thinking Eighth Circuit, which includes Minnesota, was one of the first Circuits to express displeasure over the Brunner Rule’s harshness and inappropriateness. It was also one of the first courts to put these criticisms into practice and replace the old test with one that more accurately reflects the needs of today’s student loan borrowers in Minnesota.
In 2013’s Conway v. National Collegiate Trust, the Eighth Circuit replaced the Brunner rule with a totality of the circumstances test. To determine if discharge is proper, the bankruptcy court considers:
- Past, Present, and Likely Future Resources: Brunner required judges to consider how much money a debtor could possibly Conway requires judges to consider how much money the debtor will probably make. There is a big difference between the two.
- Reasonable Necessary Living Expenses: Most college graduates do not expect to live in mansions and drive Italian sports cars, but they do expect to live somewhat comfortably. In this context, that’s the essence of “reasonable necessary living expenses.”
- Any Other Relevant Factors: This last prong obviously gives a Minnesota bankruptcy judge a great deal of leeway in these situations. If the debtor is at all sympathetic, that leeway usually works in the debtor’s favor.
A quick contrast between Marie Brunner and Chelsea Conway may be instructive. Ms. Conway had a B.A. (not a graduate degree) and a staggering $118,000 in student debt. She had tried to make payments on and off and had exhausted her remedies in terms of temporary deferrals. She had also had and lost a series of jobs through no fault of her own.
The bottom line is that if you have a large student loan balance, have limited financial means, and have made some efforts to address your student loan, there is a very good chance you will receive at least a partial discharge in Minnesota. Obviously, there is no guarantee. But, the fight is not exactly tilting at windmills.
Bankruptcy erases some Minnesota student loans. For a free consultation with an experienced bankruptcy attorney in Minnesota, contact Kain & Scott. We offer free credit repair to our clients.