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Is the way bankruptcy courts treat student loan debt going to change? - II

In our last post, we began discussing how people of all ages here in the U.S. are having difficulties with student loan debt. Indeed, statistics from the Consumer Financial Protection Bureau reveal that as many as one out of every four borrowers are either having trouble making their monthly payments or are in default.

We then went on to discuss how difficult it is for student loans to be discharged in bankruptcy thanks to the exacting standards of something known as the Brunner test, which is currently deployed by the majority of U.S. Courts of Appeals.

Finally, we started exploring how at least one circuit court actually applies something other than the Brunner test and that this fact, coupled with the possibility of another circuit joining its ranks, may ultimately force the Supreme Court of the United States to establish a universal standard once and for all.

What court is applying this different standard?

In determining whether a borrower has demonstrated that "undue hardship" would result from their having to make student loan payments and, by extension, that a discharge of student loan debt in bankruptcy is appropriate, the eighth circuit, which covers a significant portion of the Midwest, deploys a totality of the circumstances test.

What does a totality of the circumstances test entail?  

As implied by its name, the totality of the circumstances test examines all relevant factors in determining whether the circumstances of an individual donor support a finding of undue hardship. It's viewed as being a significantly less strict than the Brunner test.

What other court could adopt the totality of the circumstances test?

Right now, the first circuit, which covers a significant portion of the Northeast, is hearing an appeal in a case involving a now 62-year-old man who lost his job back in 2002 and petitioned the bankruptcy court in 2012 to have over $200,000 in federal student loans he took out to help fund college educations for his children discharged.

For its part, the first circuit has yet to adopt a standard for measuring undue hardship and experts are saying that if it elects to go with the totality of the circumstances test, it will strengthen the split among the appellate courts and likely force SCOTUS to consider the matter.

What's the federal government's stand on this?

The Department of Education has already filed a brief in the first circuit case, imploring the appellate court to adopt the Brunner test, which it says is more in line with the original intent of Congress and would help prevent abuse of the student loan system.

Please stay tuned for updates on this very important and highly intriguing bankruptcy law case.

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