The Bankruptcy Exception to Student Loan Debt

Those familiar with bankruptcy law know that discharging student loan debt under Chapter 7 and Chapter 13 bankruptcy is quite difficult – but there are exceptions. If a person with student loan debt can prove ‘undue hardship,’ it is possible to wipeout or discharge the debt.

What Constitutes Undue Hardship?

The term undue hardship does not have a universal definition as it applies to discharging student loan debt. Instead, the determination of this status varies from court to court. There are two basic tests that courts use to determine whether a person qualifies for undue hardship: The Brunner Test and the Totality of the Circumstances Test.

The Brunner Test

The most popular test used in court is probably the Brunner Test. This test uses a three-pronged measurement system to determine whether a person can discharge student loan debt through bankruptcy. The three factors are known as Poverty, Persistence, and Good Faith.

Poverty is determined by looking at the subject’s current financial situation. The courts will look at income, expenses, other debts, etc. People generally qualify for poverty if they cannot meet basic standards of living for themselves and their dependents.

Persistence basically means the current financial situation of the person involved is likely to continue for a significant amount of time. If the person doesn’t look like they will be able to make payments on the student loan debt in the future, this constitutes persistence.

Good faith simply means the person has made reasonable efforts to repay the student loan debts. This is often times a hard factor for the courts to determine, but it is a crucial piece of the Brunner Test.

The Totality of the Circumstances Test

While not used nearly as often as the Brunner Test, the Totality of the Circumstances Test is sometimes used to determine whether bankruptcy can discharge a student loan debt. This test has looser guidelines than the previous test and takes all relevant factors into account.