Oct 12

Co-makers/Guarantors Must Show Undue Hardship To Discharge Student Loan Obligation In Bankruptcy


I work in North San Diego County with offices in Carlsbad and San Marcos.  I serve clients in the areas of Bankruptcy, Elder Abuse and Probate, and I litigate those areas of law; always figured if your license allowed you to carry a big stick, you have to be willing use it when needed.

Ever since creation of the Student Loan, Congress and the Bankruptcy courts have made it more and more difficult for someone who is a co-maker or a guarantor of the loan to discharge it in bankruptcy.  Initially bankruptcy courts were not as strict with co-makers or guarantors as they were with the students who actually received the benefit of an education paid for by the loan. As case-law evolved in the bankruptcy courts the rulings began to reflect the thought that Congress intended the loan to be non-dischargeable, not the debtor.  Bankruptcy courts, in reviewing and interpreting the law’s legislative history concluded that congress was more concerned about the loan being repaid, not who repaid it.  In today’s bankruptcy environment guarantors and co-makers are held to the same repayment standard as the students who received the loan and education.

For a guarantor or co-maker of a student loan to discharge a student loan now they must show that the loan came due seven years or more before they filed for bankruptcy and that paying back the loan will cause an undue hardship upon the guarantor, co-maker and his or her dependents.  The seven-year requirement is pretty easy to calculate, but what is undue hardship?  There are a couple of standards floating around out in the court system, one being the “Totality Of The Circumstances” test, and the second “The Bruner” test.  In the totality of the circumstances the court does just that, it looks at everything in the guarantor’s or co-makers life and determines whether repaying the loan causes an undue hardship. What is undue hardship is left up to the bankruptcy judge’s discretion. Under the “Bruner Test” the guarantor/ co-maker of the student loan has to prove to the bankruptcy court by a preponderance of the evidence all the following three things: (1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself of his dependents if forced to repay the loan; (2) The state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and (3) the debtor made a good faith effort to repay the student loan.  There are a few courts that have found Bruner is too strict and have modified it by using an analysis of the debtor’s income and expense schedules and the allowances for living expenses used by the Internal Revenue Service (IRS) to guide them as to what constitutes a minimal standard of living.  In those jurisdictions, if after taking into account the expenses normally recognized by the bankruptcy court in Schedule J (expenses) and the means test, a guarantor’s or co-maker’s income is insufficient to make full payment due under a student loan over a reasonable time, the obligation to repay the student loan is discharged.

Normally speaking, Student loans, even for guarantors or co-makers are non-dischargeable.  If the co-maker or guarantor can prove undue hardship, discharge of the student loan is still not automatic.  The debtor must bring a lawsuit inside the bankruptcy case to have the court grant a discharge of the student loan.  This entails filing a complaint in an adversary proceeding under 11 U.S.C. 523(a)(8)and serving the student loan lender as a defendant in the action.  But under the proper circumstances it is worth the trouble.  Successful discharge becomes a giant step to giving someone a new lease on their financial life and helping them to become productive members of our society again.

STEPHEN C. HINZE, COUNSELOR AT LAW works and plays in North San Diego County serving the communities of San Marcos, Vista, Oceanside, Escondido, Carlsbad, Encinitas, Rancho Sante Fe, Rancho Bernardo, Fallbrook and Temecula in the legal practice areas of Bankruptcy, Elder Abuse, and Probate.  © Steve Hinze October 12, 2013

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