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Student Loan Law: 15.4.1.1 Generally

Because most student loan debt falls within one of the categories under section 523(a)(8), most bankruptcy debtors who seek to discharge these debts will face the question of whether they meet the Code’s “undue hardship” standard.

Student Loan Law: 15.4.1.2 The Brunner Test

All courts of appeals except the First and Eighth circuits have adopted the three-prong test for determining undue hardship set forth in the Second Circuit’s 1987 decision in Brunner v.

Student Loan Law: 15.4.1.3 The “Totality of the Circumstances” Test

The Eighth Circuit has endorsed a “totality of the circumstances” test for determining undue hardship.241 This test considers (1) the debtor’s past, current, and reasonably reliable future financial resources;242 (2) the debtor’s and the debtor’s dependents’ reasonable necessary living expenses;243 and (3) any other relevant facts and circumstances applicable to the bankruptcy case.244 The First Circu

Student Loan Law: 15.4.2.1.1 Overview

The three-part Brunner test begins with a consideration of the debtor’s current financial condition. While the second Brunner prong focuses on expectations for the future and the third prong examines past conduct, the first prong examines the debtor’s circumstances at the time the court makes the dischargeability determination.257 The debtor must be unable to maintain a “minimal” standard of living for themself and their dependents and still repay the student loan.

Student Loan Law: 15.4.2.1.2 Can the borrower afford to repay the loan?

The first prong of the Brunner test asks two questions: (a) is the debtor able to maintain a minimal standard of living now, and, if yes, (b) would the debtor be able to do so if they had to repay the student loans?258 Other prongs of the Brunner test, discussed in the following sections, consider whether the debtor’s financial situation is likely to improve in the future and whether the debtor has taken reasonable steps to maximize current income.

Student Loan Law: 15.4.2.1.3 Long-term income-driven repayment plans should play no role under the first Brunner prong

The first Brunner prong asks whether the debtor can maintain a minimal standard of living “if forced to repay the loans.”260 The Brunner court did not frame the question as whether the debtor can maintain a minimal standard of living and possibly obtain forgiveness of the loans twenty or twenty-five years in the future after completing a long-term income-driven repayment plan.261 The relationship between these plans and the bankruptcy undue hardship standard is considered in mo

Student Loan Law: 15.4.2.1.4 What is a “minimal” standard of living?

Most courts agree that the minimal standard of living contemplated by Brunner allows the debtor to pay for basic necessities. These include food, clothing, decent housing, utilities, communication services, transportation, and health insurance or the ability to pay for medical and dental expenses. There is little agreement among the courts as to what levels of expenditures for these items are consistent with a minimal standard of living.

Student Loan Law: 15.4.2.1.5 The role of the debtor’s assets

Under both the Brunner and “totality of the circumstances” tests, student loan creditors may point to the debtor’s ownership of certain assets, such as a home, car, or retirement account.319 The creditors may argue that, if liquidated, these assets could pay off all or part off a student loan debt. In reality, the liquidation might only exacerbate the current hardship, forcing the debtor into more expensive housing or causing job loss due to lack of transportation. Furthermore, if the asset can be claimed as exempt, 11 U.S.C.

Student Loan Law: 15.4.2.1.6 Whose income and expenses count?

The first Brunner prong looks at whether the debtor can repay the loan and provide a minimal standard of living not only for the debtor but also for the debtor’s dependents.323 The term “dependent” as used in section 523(a)(8) is not limited to individuals, such as minor children, whom the debtor has a legal obligation to support.324 For example, a hardship related to a family member can arise when the debtor provides home-based care for an infirm parent or non-dependent adult child wit

Student Loan Law: 15.4.2.2.1 Overview

Under the second prong, the court evaluates any “additional circumstances” that make it more likely than not that the debtor’s current state of affairs will continue for the remainder of the loan’s repayment term. The court must not only evaluate a wide range of current facts but must also predict whether those facts are likely to change. There are two aspects to this prong. First, the borrower must show some additional circumstances indicating that the current conditions will continue and not improve.

Student Loan Law: 15.9.4 Separate Classification of Student Loan Debts in Chapter 13 Bankruptcy

Many courts have found separate classification of student loan debts in chapter 13 bankruptcy to be fair.720 In applying the multi-factor tests for fairness, these courts emphasize certain key features of student loan debt. For example, allowing nondischarged student loan debt to increase significantly discourages repayment and compromises the important “fresh start” goal of the Bankruptcy Code.

Consumer Credit Regulation: Introduction

This set of summaries encompasses state statutes that allow lenders other than depository institutions to make installment loans. It excludes statutes and statutory provisions that:

Consumer Credit Regulation: Cal. Fin. Code §§ 22000 to 22758 (West) (Financing Law).

What types of lenders does it apply to (e.g., banks vs. non-banks)? “Finance lender” includes any person engaged in the business of making consumer loans (defined by § 22204 to include loans of less than $5,000 for non-consumer purposes) or making commercial loans. § 22009. “Finance lender” includes any person engaged in the business of making consumer loans as defined in § 22203 or making commercial loans of $5,000 or more. § 22009. Consumer loans also include commercial loans of less than $5,000 as defined by § 22204. The above statute does not apply to:

Consumer Credit Regulation: Colo. Rev. Stat. §§ 5-1-101 to 5-13-103 (Consumer Credit Code).

What types of lenders does it apply to (e.g., banks vs. non-banks)? All creditors extending consumer credit except loans to government, non-installment sales of insurance, certain transactions under public utility or common carrier tariffs, certain transactions with pawnbrokers, certain aspects of transactions involving securities and commodities accounts, and certain state-guaranteed loans. § 5-1-202. Some provisions apply just to “supervised lenders,” defined as depository institutions and licensed lenders, or to “supervised loans,” defined as consumer loans at more than 12%.

Consumer Credit Regulation: Conn. Gen. Stat. §§ 36a-555 to 36a-573 (Small Loan Law). See also Conn. Agencies Regs. §§ 36a-570-1 to 36a-570-17.

What types of lenders does it apply to (e.g., banks vs. non-banks)? All lenders, except that licensed pawnbrokers, licensed collection agencies, certain servicers, passive buyers of small loans, and retail sellers that finance purchases or their goods are exempt from licensing requirements, and banks and credit unions and their subsidiaries are entirely exempt. § 36a-557.

Consumer Credit Regulation: D.C. Code §§ 26-901 to 26-912 (Money Lenders Law with Licensing Provisions), 28-3301 (Interest Rate Limitations).

What types of lenders does it apply to (e.g., banks vs. non-banks)? Licensure law does not apply to “the legitimate business” of national banks, licensed bankers, licensed mortgage brokers, licensed mortgage lenders, trust companies, savings banks, building and loan associations, small business investment companies, or life insurance companies. § 26-910(a).

Licensure requirements and implications of licensure: Must have license to engage in business of loaning money at more than 6%. § 26-901(a).

Consumer Credit Regulation: Fla. Stat. §§ 516.001 to 516.36 (Consumer Finance Act).

What types of lenders does it apply to (e.g., banks vs. non-banks)? Any lender except banks, savings banks, trust companies, building and loan associations, credit unions, or industrial loan and investment companies. A pawnbroker may not be licensed to transact business under the chapter. § 516.02(4).

Licensure requirements and implications of licensure: Must have license to engage in business of making “consumer finance loans.” § 516.02.