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August 1, 2015
Indiana Bankruptcy Attorney Steven Taylor


Authored by:  Steven P.Taylor


Student loans have become one of the largest components of debt in American society.  The economic significance of the issue is reflected by the enormous amount of student loan debt relative to the overall debt structure of our economy.  Student loan debt is $1.2 trillion and is second only to mortgage debt which stands at $8.17 trillion.  Credit card debt stands at $0.9 trillion.   This size is a major problem that the bankruptcy system must address to effectuate its policy goals of fresh start (Chapter 7 bankruptcy) and rehabilitation (Chapter 13 bankruptcy).

The researchers at the St. Louis Federal Research  determined that, as of Jan. 1, more than half of student-loan debt–55%– was held by borrowers who were in repayment, or roughly $660 billion.  Of that amount, nearly $200 million are in income based repayment programs.  Even so, recent research shows that nearly 1 in 3 people whose student loans are in repayment status are at least one payment behind on their payments according to the Federal Reserve Bank of St. Louis which is substantially higher than those for other forms of consumer credit, including credit cards, mortgages and auto loans. For example, 8.5% of all auto loans were at least 30 days delinquent in the year through last September.

This situation is a frightening from two aspects.  First, the above statistic does not account for the (typically unemployed) college borrowers who are not even required to make payments until six months after they leave.  Secondly, it does not include former students that are out of school, past that grace period, and have received permission by their lender to suspend payments for a range of reasons, like unemployment.  There remains $540 million of debt to be repaid based upon no work history and speculative prospects.

With respect to mortgage debt and credit card debt, the bankruptcy courts can discharge the credit card debt and the in personam liability related to mortgage debt.  But in order to wipe out student loans in bankruptcy, you must prove to the court that paying them would cause you undue hardship pursuant to 11 U.S.C. §523(a)(8).  In interpreting that section, most bankruptcy courts follow the Brunner[i] test which outlines three (3) criteria to qualify for undue hardship

The Seventh Circuit articulated these three (3) criteria  as follows:

(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for [himself] and [his] dependents if forced to repay the loans;

(2) that 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) that the debtor has made good faith efforts to repay the loans.

The Seventh Circuit over the past three (3) years has had some decisions which have added texture to the implementation of the Brunner test which is instructional to the practitioner.  My takeaway from these cases is below.

Recent Seventh Circuit cases

Krieger v. Educational Credit Management Corp., 713 F.3d 882 (7th Cir. 2013) This case is notable for two reasons.   First, it stated that the 2nd and 3rd prongs of the Brunner tests are either a mixed question of law and fact or clearly factual.  In either case, the standard of review of the bankruptcy court’s ruling should upheld unless clearly erroneous.  Second, the Seventh Circuit’s reviewed the standards that the District Court applied to Brunner test and found that the District Court’s assertion that as a  proposition of law that a failure to use an available federal student loan repayment plan means the debtor fails the good faith element of the Brunner test was wrong.

Greene vs. U.S. Department of Education, 770 F.3d 667 (7th Cir 2014).  Although not really on point as to the Brunner test, in dicta, the Seventh Circuit opined that the amount of student loan debt owed is a different issue from whether making him pay what he owed would impose an undue hardship.  The size of the debt is relevant—the larger it is, the more likely that imposing full liability on the debtor will produce an undue hardship—but calculating the debt involves a different factual inquiry from whether the debt so calculated is crushing.

Tetzlaff v. Educational Credit Management Corporation, No. 14-3702 (7th Cir. 2015).  This case is notable in that it reiterates Krieger ‘s deference to the bankruptcy court judge’s findings of fact as to the 2nd and 3rd prongs of the Brunner test.  It also in reviewing the bankruptcy court’s findings of facts noted that payment on one student loan debt did not show good faith with respect a different student loan debt, at least if they were not joined in the same adversary proceeding.   The Court noted that a debtor’s good faith efforts to repay his student loans are measured by his ability to obtain employment, maximize income, and minimize expenses.


What does this all mean?  It means that it exceedingly important to present your case properly to the bankruptcy court judge at the outset.  The factual findings are going to control and only clearly erroneous factual decisions will be reversed.   In Tetzlaff, the Plaintiff had two expert witnesses excluded due to late disclosure.  In addition, the dicta in the Greene case may indicate that the Seventh Circuit is  open to a partial discharge to the extent that remaining liability would not impose an undue hardship.

If you have student loan debt problems or are considering filing bankruptcy to tackle your student loan debt, make sure you have a bankruptcy attorney review your options.

For more information about this and other bankruptcy law issues, please contact me by email or call at 317-271-1111.

[i] Brunner v. New York State Higher Education Services Corp, 831 F.2d 395 (2nd Cir. 1987)

One Comment
  1. Awesome article conclusion, you made it easier for us to comprehend everything..many thanks to you!

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