Earlier this year a Wisconsin Bankruptcy Court decided that debtor Bradley A. Mhyre was entitled to have his student loans discharged in bankruptcy under the Brunner Test for determining undue hardship. In 1994 Mhyre sustained a neck injury that left him paralyzed from the chest down leaving him limited use of his shoulders and arms. Despite this in Mhyre decided to attend college in an effort to learn a trade. After earning a degree he spent 5 years looking for full time employment. Finally after a long search he had become employed, however his income fell far short of his basic monthly expenses. These circumstances led him and his caregiver to file for bankruptcy in 2012. In doing so Mhyre asked the court to discharge his school loans he owed to the U.S. Department of Education (DOE).
The DOE opposed the discharge arguing that the payment of the student loans would not result in an undue hardship for Mr. Mhyre. However the Court disagreed with the DOE and granted the discharge to Mr. Mhyre. The court determined this by using the test set forth in Brunner, which determines whether the debtor will face undue hardship if required to pay back the loan. The test goes through a three part analysis which asks: 1) whether the debtor can maintain a minimal standard of living based on their current income and expenses if required to repay the loan; 2) if there are any additional circumstances indicating that the current financial circumstances of the debtor are likely to persist for a significant portion of the repayment period; 3) and whether a good faith effort was made to repay the loan.
In its analysis the court believed that all three prongs of the test were met since 1) the debtor was unable to break even each month; 2) It would be futile for him to seek alternative work; and 3) that he made a good faith effort to pay back the student loan by getting himself off of Social Security Disability. Despite the fact that Mr. Mhyre incurred the debt after he became quadriplegic, was not enrolled in income based repayment plan, and failed to make any payment to the DOE out of an inheritance he received, the court still found that a good faith effort to pay back the student loan was made. What all this means is that it is still possible to discharge student loans in bankruptcy in some limited circumstances. If debtors can prove that they will face an undue hardship if required to repay their student loans they may be eligible to have these loans discharged.
For more information on discharging Federal Student Loans visit: www.studentaid.ed.gov