Student loans, unlike other forms of consumer debt, are very difficult to discharge in bankruptcy court. Under 11 U.S.C. §523(a)(8), only in certain circumstances where a debtor can show undue hardship will student loans be dischargeable in a bankruptcy court. Bankruptcy courts apply what is referred to as the Brunner test, which requires a debtor prove undue hardship by showing that:
The debtor cannot maintain, based on current income expenses, a minimal standard of living for herself and her dependents if forced to repay the loans;
Additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
The debtor has made good faith efforts to repay the loans.
In re Cox, 338 F. 3d 1238, 1241 (11th Cir. 2003)(citing Brunner v. New York State Higher Education Services Corp., 831 F. 2d 395 (2d Cir. 1987). “If any one of the requirements of the Brunner test are not met, the student loan is not dischargeable.” In re Wolfe, 501 B.R. 426, 433 (Bankr. M.D. Fla. 2013)(citing Krieger v. Educ. Credit Mgmt. Corp., 713 F. 3d 882, 884 (7th Cir. 2013).
In the case of In re Johnson, the debtor, who had no children and whose monthly income totaled approximately $2,000.00 per month, testified that he “believe[d] he ha[d] paid almost all of the principal balance of his student loans, albeit mostly through garnishment of income and income tax refunds, and that the balance of his student loan debt is comprised primarily of interest and penalties.” 541 B.R. 759, 762-63 (Bankr. N.D. Ala. 2015).
The bankruptcy court, in applying the Brunner test, concluded that the debtor could not satisfy any of the Brunner factors, as: (1) the debtor admitted that repayment of the student loans would not impose an undue hardship on the debtor and his dependents; (2) the debtor and his dependents do not have serious mental or physical impairments that would prevent them from working; and (3) the debtor has not made voluntary payments on the loans and could not testify that he entered into a repayment option with the Department of Education. Id. at 767.
The bankruptcy court, in addressing the debtor’s claim that his student loan debt is comprised primarily of interest and penalties, pointed out that “when [the debtor] obtained the student loans he agreed to pay the interest that accrued on the loans as well as late fees or other charges assessed on the loans due to his failure to pay the loan as agreed." Id.
Thus, student loan lenders and servicers can rest assured that their protections remain under the bankruptcy laws, and discharges will be afforded only under narrowly tailored circumstances.
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