How to Prove Undue Hardship For Student Loans

Is your student loan debt so crushing that you’re considering bankruptcy? You’re not alone.

Contrary to popular belief, it’s not a dead-end.

While getting a court to discharge your student loans is no cakewalk, the term you need to focus on is ‘undue hardship.’ Nail that, and you could open the door to a life less burdened by debt.

Ahead, we’ll dissect what ‘undue hardship’ really means, how you can prove it, and why some judges are starting to see things differently.

Related: Can You File Bankruptcy on Sallie Mae Student Loans?

Federal law makes it extremely challenging for people to cancel student loans using bankruptcy. Despite many amendments, Congress never defined undue hardship. As a result, courts needed to develop their own definition. Most courts adopted the Brunner test, which originated from a 1987 case in which Marie Brunner attempted to discharge her student loan debt less than a year after completing a master’s degree.

To stop debtors from rushing to bankruptcy court soon after graduating to wipe away their student debt, the court laid out a three-pronged test to gauge a borrower’s hardship. Under the Brunner Test, Borrowers must prove:

• Their current income and expenses prevent them from maintaining a minimal standard of living if they have to repay the debt.

• Their financial situation is likely to persist for a significant part of the repayment period, forcing the judge to predict their future.

• They made a good-faith effort to pay the loan by trying to increase their income and minimize their expenses.

A handful of other courts, mainly in the Eighth Circuit, found the Brunner Test too restrictive and instead adopted the more flexible totality-of-the-circumstances test. Under this standard, courts consider a borrower’s:

• past, present, and future financial resources

• reasonable living expenses

• other relevant factors related to bankruptcy proceedings

Since lawmakers never defined what debtors had to do to prove their financial hardship was undue, federal courts have spent years struggling to do it themselves using different tests. Ultimately, what qualifies as undue hardship for student loans shifts depending on the judge your case is in front of, your financial situation, and the efforts you’ve made to repay your loans before seeking debt relief in bankruptcy.

• Step 1 – File Bankruptcy. Before filing a student loan bankruptcy case, you have to file a bankruptcy case. Most borrowers will file Chapter 7 bankruptcy or Chapter 13 bankruptcy. The right type of bankruptcy for you depends primarily on your household income and assets (equity in a home, savings, etc.).

• Step 2 – Gather evidence. You’re not required to try to cancel your loans before your bankruptcy case ends. You can file the paperwork after you get your bankruptcy discharge. So take your time and gather all the available evidence to prove you have an undue hardship to the court. More on what evidence to look for below.

• Step 3 – Draft the complaint. The complaint is a simple statement describing the debt you owe and who you owe it to, explaining the harm the debt causes you (undue hardship), showing that the court has jurisdiction, and asking the court to order relief.

• Step 4- File the adversary proceeding. The AP consists of the complaint and an adversary cover sheet. You’ll file both documents with the court. Once received, the court will issue a summons that you’ll need to provide to the loan holder along with a copy of the complaint.

• Step 5 – Litigate the case. The fight truly begins after the attorney for the lender or student loan servicer responds to the lawsuit. Over the next several weeks and months, you’ll exchange discovery, make court appearances, file motions, assess the merits of the case, and, possibly, have a trial. During this time, the parties can decide to settle and dismiss the lawsuit.

To prove undue hardship, you must file for bankruptcy and then present your case in an adversary proceeding. During this legal process, your creditors can challenge your request. The court will use tests like the Brunner Test to evaluate if repaying your loan would indeed cause undue hardship.

1. Loan Type: Federal loans have repayment plans that make them harder to discharge in bankruptcy than private loans.

2. Interest Rates: Show the court how fast your loan grows monthly due to interest, even if your income goes up.

3. Repayment Length: You’ll need to prove that you can’t pay back your loans for a big part of their repayment term.

4. Repayment Plans: If your lender offers no affordable plans, it’s easier to argue your case.

5. Loan Forgiveness: If you qualify for this, it’s harder to prove undue hardship.

6. Debt Size: Ironically, the more you owe, the easier it might be to make your case.

7. Income History: Use tax returns and W-2s from the last five years to show why you can’t afford to pay.

8. Monthly Expenses: Show the court that you can’t maintain a decent standard of living while paying back your loans.

9. Is Your Hardship Long-Term?: The longer your financial struggle, the stronger your case.

10. Employment: Working full-time or having multiple jobs can help you.

11. Social Security: Disability benefits can tip the scale in your favor.

12. Spouse’s Income: Yes, this counts, even if they aren’t connected to your loans.

13. Kids: If you have them, especially young ones, it’s easier to prove long-term hardship.

14. Disabilities: A disability could either help you or lead to a separate discharge process.

15. Payment Efforts: If you’ve tried to pay back your loans, that counts in your favor.

16. Home Equity: The less you have, the stronger your case.

17. Savings: Little or no retirement savings could make your case stronger.

18. Special Cases: Anything else that makes repayment impossible? Highlight it.

There are four possible outcomes for undue hardship cases.

• Full discharge. The judge or the lender agrees that you’ve met your burden of proof and will wipe out all of your education debt.

• Partial discharge. The judge decides you can repay some but not all of your loans while maintaining a minimal standard of living. You remain responsible for paying the remaining balance.

• No discharge. You fail to pass the undue hardship test and owe the entire loan balance. However, the court could decide to use its equitable powers to lower your interest rate or cancel your tax liability if your loans are forgiven after making enough payments.

• Settlement. Your lender agrees to reduce the balance owed on the loans. The settlement could be for a lump sum, monthly payments, or a combination of the two.

Over the years, lawmakers have tried to change the legal standard to allow debtors to cancel student loans like other debt.

• 2015 – President Barack Obama directed the U.S. Department of Education to “issue information highlighting factors the courts have used in their determination of undue hardship,” with hopes to help the Department of Justice determine whether to challenge discharge cases.

• 2018 – The Higher Ed Act of 2018 sought to expand the definition of undue hardship and make meeting the legal standard more attainable for more student loan borrowers.

• 2019 – Sen. Dick Durbin (D. Illinois) and Rep. Jerrold Nadler (D. New York) introduced the Student Borrower Bankruptcy Relief Act of 2019. Rep. John Katko (R. New York) introduced the Discharge Student Loans in Bankruptcy Act of 2019.

• 2020 – The House Judiciary Committee introduced the Consumer Bankruptcy Reform Act of 2020 to make student loan discharge easier to accomplish.

• 2021 – Senate Democrats released the Medical Bankruptcy Fairness Act of 2021, which would allow borrowers to discharge their student loans without having to prove undue hardship. The bill would amend the U.S. Bankruptcy Code to remove the section that treats student loan debt differently from other dischargeable consumer debts. Read more about student loans as consumer debts.

• 2021 – Sen. Durbin and Sen. John Cornyn (R. Texas) introduced the Fresh Start Through Bankruptcy Act of 2021. The bipartisan bill would allow federal student loans to be discharged without proof of undue hardship once borrowers have been in repayment for 10 years.

If meeting the legal standard for undue hardship isn’t realistic for you, other options could give you some relief.

• Refinance. If you have a blemish-free credit report, good credit score, and enough income to cover your other debt payments, refinancing student loans for a lower interest rate and longer repayment term may be an option.

• Income-driven repayment. All borrowers with federal student loans, even those with Parent PLUS Loans, can request an affordable monthly payment tied to their discretionary income.

• Forgiveness. Each IDR plan will cancel your remaining balance after you make at least 240 monthly payments. The Department of Education has other programs that will wipe out your loans if you attended a fraudulent school, suffered a severe and permanent physical or mental disability, or worked full-time in public service.

There are a lot of steps to successfully file a student loan bankruptcy case. It makes sense to speak with a lawyer with knowledge of bankruptcy law and student loans to assess your chances of proving undue hardship. Since 2014, I’ve helped dozens of borrowers across the United States file adversary proceedings to prove undue hardship.

Schedule a call with me today. We’ll work together to determine the best strategy to deal with your student loans inside and outside of bankruptcy.

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