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Student loans, Chapter 7 and the Brunner rule

We recently wrote about the concerning rates of student loan default in America today, and the important fact that bankruptcy cannot eliminate this kind of debt as it can others. Let's take a look at how this reality has played out for one Texas resident who filed for Chapter 7 bankruptcy, and the very narrow (virtually impossible) exceptions to the student loan rule which some are advocating to change.

The story recently came to light of a Texas woman who borrowed $7,000 in student loans back in 2012. She was in her late 50s at the time and enrolled in two semesters at a community college. By 2014, she was unemployed, in part due to struggles with diabetic neuropathy. She was unable to make payments on her student loans, not to mention other debts, and filed for Chapter 7 bankruptcy in 2017.

Chapter 7 bankruptcy eliminated her debt from sources like credit cards, medical expenses, even her auto loan. It did not, however, wipe out her student loans. A judge ruled that, despite her ongoing illness, unemployment and poverty, she did not meet the standard of being totally incapable of paying her student loans at this time or at any time in the future.

This extreme standard for student loan discharge in bankruptcy has been around since 1987 and is known as the Brunner Rule. It requires that borrowers have made efforts to pay off their loans in good faith, that making payments would force them below a minimum living standard, and that those circumstances are not likely to change any time soon. These have only ever been met in a few cases nationwide.

A number of organizations are advocating for change to the standard, and the judge in the woman's case even expressed sympathy but felt he was bound by the law. As noted previously on our blog, bankruptcy should typically not be seen as a tool to directly wipe out student loan debt. It can, however, make manageable payments possible by eliminating other types of debts.

Source: Dallas News, "She has no home, car or job after bankruptcy, but still owes for student loans," Kevin Krause, Feb. 2, 2018

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