New York is home to some of the nation's finest universities, and the students who attend them often take on tens of thousands of dollars of debt to pay their tuition and living expenses. Individuals who are struggling to make student loan payments often believe that this type of debt cannot be discharged in a personal bankruptcy, but this is not always true. While the Bankruptcy Abuse Prevention and Consumer Protection Act does make student loans exempt from discharge most of the time, the 2005 law does allow relief to be granted to prevent undue hardship.
The problem facing bankruptcy filers is that the lawmakers who drafted the bill were not clear about what ‘undue hardship” actually means. The Department of Education is working to create a definition to clear up the ambiguity, but determining what is and what is not an undue hardship is currently the job of the courts. Most courts use the Brunner test to evaluate hardship. The test is named after the plaintiff in a 1987 New York bankruptcy case.
When applying the Brunner test, judges take three factors into consideration. They first look at the bankruptcy petitioner's income and bills to find out if making his or her student loan payments would leave him or her with enough money to maintain a minimal standard of living. Judges then determine whether the petitioner's situation is likely to change in the future. The final part of the Brunner test is evaluating the efforts the petitioner has made to make his or her student loan payments in a timely manner.
Individuals sometimes remain in unmanageable financial situations because they believe their debt cannot be discharged in a bankruptcy, or they worry that filing a Chapter 7 or Chapter 13 petition will ruin their credit and make future borrowing impossible. The bankruptcy code was written to provide Americans with second chances, and attorneys with experience in this area may spend much of their initial consultations dispelling these and other myths.