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Another Sign That Student Loans May Become Easier to Discharge

Posted on Oct 04, 2010
There is no question that student loans are one of the most difficult debts to get rid of in bankruptcy, and with the changes made to the bankruptcy code in 1994 and 2005, it has gotten even harder.  However, recent cases and proposed changes to the Code have indicated that the tide may be turning back in favor of debtors to make these oft-times onerous debts easier to get rid of.

Since 1987, debtors have been struggling to meet the dischargeability test formulated in the Federal Second Circuit Court of Appeals case of Brunner v. New York State Higher Education Services Corp. which set out a three-part "Brunner" test for dischargeability.  In it, a debtor must show:
  • inability, at his current level of income and expenses, to maintain a "minimal" standard of living;
  • the likelihood that this inability will persist for a significant portion of the repayment period; and
  • the existence of good faith efforts to repay the student loans.
Not an easy test to meet, and many have failed it.  Not making enough money just isn't enough.  But last week the First Circuit Court of Appeals Bankruptcy Appellate Panel in the case of In re Bronsdon rejected the Brunner test, instead deciding to follow the standard used by the Eleventh Circuit Court of Appeals, which is a "totality of circumstances" test.  This they summarized as: "Can the debtor now, and in the foreseeable future, maintain a reasonable, minimal standard of living for the debtor and the debtor's dependents and still afford to make payments on the debtor's student loans?"  In effect, the third prong of Brunner was rejected.

The court here adopted a "kinder, gentler" standard that, in essence, states that the bankruptcy court should examine the debtor's circumstances and determine whether repayment would cause the debtor, or the debtor's dependents, undue hardship.  Simple.  Hopefully, this is another sign that the pendulum is swinging back in the other direction to help debtors who are truly suffering in these hard economic times.

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