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What is Undue Hardship for Student Loans?

Foreclosure TaxWhat is an undue hardship for a student loan. In order to hardship discharge a student loan, a debtor has to prove repayment would be an “undue hardship.” But hardship and what a judge thinks is an “undue hardship” will probably be two separate things.

Kentucky and most state have the Bruner test but even under the most liberal test called the Andresen test it is difficult to hardship discharge student loans. In re Andresen, 232 B.R. 127 (B.A.P. 8th Cir. 1999)

The Bruner or The Andresen Bankruptcy Test?

The Andresen test applies a test similar to the Brunner and looks at the “totality of the circumstances” taking into account the debtor’s past, present and future ability to pay, the debtor’s family’s expenses to maintain a minimal standard of living, and any other relevant facts or circumstances surrounding their situation. It does not require the debtor to prove they made an effort to repay in the past and focuses on the future ability to repay.

In theory it seems more generous in discharging student loans, the reality is that still very few people qualify. One 39-year old woman with a 10-year old child earning $14,000 in Minnesota with $61,000 in student loans living with her parents suffering from medical problems and working only 9-months of the year who was pursuing an additional degree was declined a discharge.

She was declined a hardship discharge of her student loans because, she might earn more after completing the additional degree and at her income level, she could have paid $54/month under the Income Contingent Repayment Program (ICRP). Since the ICRP would result in forgiveness of the debt after 25-years (and before retirement) then it was not an undue hardship.

If your “hypothetical budget” can afford the ICRP payment then that is often the decisive factor. One Missouri court, found “the debtor’s ability to afford payments under the ICRP is determinative.” The criticism of this ICRP-focus is that it does not take into account the taxes that result from the “forgiveness” of tens of thousands of dollars of debt in one year. And, how reasonable is it for someone earning only $14,000/year — with dependents and over $60,000 of debt on their credit report already — to finance a car to get to work or a home to live in? It virtually ensures the failure of any “fresh start” that is the essential goal of a bankruptcy.

The Debtor is almost always stuck in a Catch 22 situation where in order to prove undue hardship they have to hire expert witnesses and attorneys where if they can afford the attorneys it proves that they can afford the repayment of the student loan.