Important News on Discharging Student Loan Debts in Bankruptcy

Now don’t go running off to file bankruptcy, but…

Student loan debt is exploding but is virtually impossible to get discharged in bankruptcy. But a case in the 7th Circuit may have made some progress on this issue. The problem is that the standard for discharge has been the so-called “Brunner Test,” which requires:

  1. The debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;

  2. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

  3. The debtor has made good faith efforts to repay the loans.

In a case (Susan M. Krieger v. Educational Credit Management Corp, 7th Cir., 2013) that went to the 7th Circuit, they found that the Brunner Test was too harsh and that like any debt the test should be an “undue hardship” rather than the difficult standard of Brunner. On April 10, 2013, the Seventh Circuit reversed the District Court decision and reinstated that of the Bankruptcy Court that ruled in Krieger’s favor.  

Susan Krieger was a destitute 53 year old who had spent 11 years paying off loans taken out to take paralegal courses. She never found work as a paralegal and had quite little income or prospects. The Bankruptcy Court found that her student loan should be discharged. The District Court used Brunner to reverse. But the 7th Circuit took a more sympathetic view. 

If you have excessive student debt this case could be a step forward to help.

The Chief Justice’s opinion: