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Student loans present a uniquely difficult obstacle to debtors in bankruptcy. Federal law completely excepts student loans from discharge, unless a debtor can show “undue hardship” to themselves and their dependents. 11 U.S.C. § 523(a)(8). Most courts around the country use a three-prong test to determine if a debtor has established “undue hardship,” known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs., 831 F.2d 395 (2d Cir. 1987). The Ninth Circuit, which includes California, adopted the Brunner test in In re Pena, 155 F.3d 1108 (9th Cir. 1998). A California bankruptcy court recently considered a debtor’s claim of undue hardship in an order that includes an in-depth review of the Brunner test. In re Shells, No. 11-26042, Adv. No. 14-2111, mem. dec. (Bankr. E.D. Cal., May 7, 2015).

The debtor in Shells obtained student loans for her bachelor’s and master’s degrees. According to the court, she consolidated several private loans into a single U.S. Department of Education (DOE) loan in 2007, with a principal balance of over $96,000 at 7.375 percent. She has reportedly been employed full-time by the county since 1998, and she claimed a net monthly income of just under $6,000. Her husband is disabled, and the two of them have three children.

At the time of the court’s order in May 2015, the student loan balance had grown to more than $137,000. The court noted that the debtor had obtained an Income-Contingent Repayment (ICR) plan in late 2008, which reduced her monthly payment. She reportedly defaulted on the ICR plan twice. She filed for Chapter 7 bankruptcy in March 2011 and received a discharge, which did not include the student loans, that June. She received an Income-Based Repayment (IBR) plan in March 2013 but reportedly defaulted again. After reopening her Chapter 7 case in April 2014, the debtor filed an adversary proceeding against the DOE to discharge the student loan debt. The DOE moved for summary judgment.

Once a creditor has established that a debt is a student loan under § 523(a)(8), the debtor must establish undue hardship. The Brunner test requires a debtor to prove three elements by a preponderance of evidence:

1. The debtor’s current income and expenses would prevent her from maintaining a “‘minimal’ standard of living for herself and her dependents” if the loans are not discharged;
2. “Additional circumstances” indicate that the current situation is “likely to persist” for a substantial part of the loan repayment period; and
3. The debtor has made “good faith efforts” to make loan payments.
Brunner, 831 F.2d at 396.

The court found that the debtor had not satisfied any of the Brunner prongs. On the first prong, it found that she could make the $321 monthly payments under the IBR plan with “minor adjustments to [her] monthly expenses.” Shells, mem. dec. at 9. With regard to the second prong, the court found that, rather than facing “insurmountable obstacles” to repayment of the loans, the debtor could be eligible for loan forgiveness as a county employee. Id. at 10. Finally, the court held that the debtor’s multiple defaults precluded her from claiming good faith efforts at repayment. It granted the DOE’s motion for summary judgment.

Bankruptcy attorney Devin Sawdayi represents individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 cases, helping them repair their finances with dignity and respect. To schedule a free and confidential consultation with an experienced and knowledgeable financial advocate, contact us today online or at (310) 475-939.

More Blog Posts:

Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015

White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014

Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014