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Is the definition of 'undue hardship' about to change?

It is widely stated and generally believed that student loan debt cannot be discharged as part of the bankruptcy process. As we have said on a number of occasions, and in one post in particular, erasing student loan debt in bankruptcy can be a challenge, but it is not impossible.

A key factor in whether a person from the Chicago area should include student loans in a filing for Chapter 7 or some other form of personal bankruptcy hinges on how well they do on what's called the Brunner test. If a filer can show that continuing to pay a student loan would cause "undue hardship" as gauged by three criteria, the student loans could be discharged in part or in whole.

The problem, according to many legal observers, is that the Brunner test is something that developed out of a court case. Bankruptcy laws don't specify what constitutes undue hardship and so the Brunner test has come to be the norm.

Some describe it as nebulous. Many consider it an impossible standard to meet, which is why court watchers have their eyes trained on a case now under consideration in Boston. The First Circuit Court of Appeals is studying the request of a 65-year-old man who suggests he faces the possibility that he will only be free of student loan obligations after he is dead.

The one-time president of a manufacturing firm has been out of work since 2002. His retirement savings are gone. He has lost his home. According to records, he owes $246,000 in Parent Plus student loans. He has told the court that he estimates that even if he could find a $50,000 –a-year job and paid on the loans until he turned 77, the interest accrued would push the balance owed to $500,000.

Clearly a softening of the standard of what constitutes undue hardship would be a boon for a great many consumers. But it's important to remember that it is not impossible to obtain discharge under the standards in use today. The key is that you have to be willing to ask. Many don't.

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