What 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, establishing hardship and what a judge thinks is an “undue hardship” will probably be two separate things. However, every year about 500-1000 people get the undue hardship discharge in bankruptcy court for their student loans.

Interestingly, two of the best student loan lawyers are Morgan King and Josh Cohen. Both lawyers produce seminars on student loan discharges and managing student loans. Morgan King also co-authored a book on it.

Kentucky and most states 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 harsh Brunner test (started in New York) is the three-part standard test. This test covers three elements as follows:

  1. The debtor has made attempts at payment.
  2. He cannot currently pay without creating an undue hardship for himself and his dependants.
  3. He will probably never be able to repay without undue hardship.

The Bruner vs. Andresen Bankruptcy Test

The Andresen test applies a test similar to Brunner and looks at the “totality of the circumstances.” This takes into account the debtor’s past, present, and future ability to pay. It also looks at the debtor’s family’s expenses to maintain a minimal standard of living along with any other relevant facts or circumstances surrounding their situation. However, 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, but, the reality is that very few people qualify.

Here’s an example. A 39-year old woman with a 10-year old child earning $14,000 in Minnesota with $61,000 in student loans. She lives with her parents and suffers from medical problems. She is working only 9-months out of the year and is pursuing an additional degree. Unfortunately, the judge declined a hardship discharge due to her income level and the fact she has higher earning potential after completing the additional degree.

However, she can pay $54 per month under the Income Contingent Repayment Program (ICRP). Since the ICRP results in forgiveness of the debt after 25 years (and before retirement) then, she does not have an undue hardship.

If your “hypothetical budget” can afford the ICRP payment then that is often the decisive factor. As another example, a Missouri court stated “the debtor’s ability to afford payments under the ICRP is determinative.”

Criticism of the ICRP

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.

How reasonable is it for someone earning only $14,000 per year, with dependants, and over $60,000 of debt on their credit report to finance a car or a home? It virtually ensures the failure of any “fresh start” which is the essential goal of bankruptcy.

The Debtor is almost always stuck in a catch 22 situation with ICRP if they try to prove undue hardship. On one hand, they have to hire expert witnesses and attorneys. But on the other hand, if they can afford the attorneys it also proves that they can afford the repayment of the student loan.

Do you need help managing your student loan? Contact my office right away to start the conversation. Nick C. Thompson, Attorney: 502-625-0905

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