The average debt-laden college graduate has almost $30,000 in student loans. That amount has increased 25 percent since 2008. Even with low interest rates and extended repayment periods, the monthly payment is often several hundred dollars a month. That’s a lot of money for anyone, and especially for young people. Quite understandably, many of these individuals delay major purchases and are overly-cautious with their money.
Student loans are clearly oppressive debts that the Bankruptcy Code was designed to eliminate. But revisions to the law in the 1980s included a provision in the law which limited discharge to situations involving undue hardship. Lawmakers intentionally did not define the phrase.
Despite the change, most bankruptcy debtors in Minnesota obtained at least a partial discharge. The ones that got no relief usually did not even try. That should remind people that they need aggressive bankruptcy lawyers. Furthermore, some recent court decisions in the Eighth Circuit, which includes Minnesota, have made student loan discharge even easier to obtain.
The Original Undue Hardship Test
About a decade after the 1980s modifications, the Second Circuit in New York decided Brunner v. New York State Higher Education Services Corporation. There’s an old saying among Minnesota lawyers that bad facts often make bad law. Brunner is a very good example.
Marie Brunner graduated with about $2,000 in student loans. Even in 1980, that was not an eye-popping amount of money. She declared bankruptcy almost immediately after graduation. She did not try to work with her lender or make any effort to repay the loan, even though she was apparently working in her chosen field.
There was a prejudice at the time which held that some student radicals borrowed their way through school in the early 1970s and had no plans to repay the loans. Based on the facts, the court probably assumed that Ms. Brunner fell into that category. So, it declared that an “undue hardship” discharge was only available if the debtor:
- Had made a good-faith effort to repay the loans,
- Could not maintain a minimal standard of living if s/he repaid the loans, and
- Had a permanent or semi-permanent disability.
Almost immediately, many observers in Minnesota criticized the Brunner test for its harshness. The elements are also mutually exclusive. It’s nearly impossible to have a good payment history if the payments would bring the family below the poverty line.
Yet empirical studies showed that most debtors who sought relief obtained at least a partial student loan discharge. Often, the court would discharge enough of the loan to make the payments more affordable.
The New Undue Hardship Test
The Eighth Circuit was one of the first U.S. appeals courts to do away with the Brunner rule and replace it with a more lenient analysis. In Minnesota, this totality-of-the-circumstances test has three prongs:
- Past, present, and future financial resources,
- Debtor’s reasonably necessary living expenses, and
- Any other factors the court deems relevant.
A non-exhaustive list of some “other factors” includes the debtor’s attempts to negotiate a deferral or other non-bankruptcy relief, the debtor’s payment history, the debtor’s frugality, and the anticipated length of the hardship.
In Re Fern, a 2017 Eighth Circuit case, illustrates how this test works in practice. Sara Fern borrowed about $27,000 to become an accounting clerk. But she could not complete the program. At the time of her bankruptcy, she was a single mother of three children working a part-time job. She made ends meet with the help of public assistance and had never made any payments on her loans.
Under the Brunner rule, Ms. Fern probably would not qualify for discharge. She did not have a good payment history and her hardship was simply economic. Many circuits still use the Brunner test, although some are a little more lenient than others.
But under the Eighth Circuit’s test, Ms. Fern clearly did qualify for discharge. Maybe she did bite off more than she could chew in her choice of a degree plan. But for the most part, her circumstances were beyond her control. She could not build a life for her and her children with a $27,000 tab hanging over her head.
Your student loans might be dischargeable in a Minnesota Chapter 7 or Chapter 13. For a free consultation with an Minnesota Bankruptcy Attorney contact Kain & Scott. We have six offices in the Minneapolis area.