The Bankruptcy Abuse Prevention and Consumer Protection Act, which was signed into law in 2005, makes student loan debt exempt from discharge in most situations, and individuals who seek relief from educational loan obligations are generally required to establish undue hardship by passing the Brunner test. However, Minnesota is one of a handful of states where bankruptcy courts apply the totality of circumstances test instead of the Brunner test.
To pass the Brunner test, an individual’s situation must meet three criteria. Making their required monthly student loan payments must not leave them enough money to enjoy even a minimal lifestyle, their situation must be unlikely to change significantly in the future, and they must have made good faith efforts to pay their debts. The Eighth Circuit, which includes the District of Minnesota, has ruled that this sets an unfairly strict standard and includes a good faith requirement that is not found in the bankruptcy code.
The totality of the circumstances test applied in the First and Eighth Circuits takes an individual’s entire situation into consideration rather than relying on firm rules. Factors that judges in Minnesota may consider when determining whether student loan debt should be dischargeable in a bankruptcy include the individual’s past, present and likely future earnings, their reasonable living expenses and the facts surrounding their particular case.
Attorneys with debt relief experience may spend time during their initial consultations to dispel the many misunderstandings about bankruptcy. These include misconceptions about the impact that debt relief has on credit ratings, asset forfeiture in Chapter 7 cases and the ability to discharge student loan debt. Attorneys may then point out that bankruptcy offers the chance of a fresh start, and filing a Chapter 7 or Chapter 13 petition puts an immediate end to daily harassment from bill collectors and creditors.
Source: Bloomberg Law, Student Loan Debt Dischargeability – Courts Discuss Limits of Brunner Test, Steven F. Werth, Jan. 27, 2016