What is a “substantial or undue hardship” when it comes to student loans?

A debtor must establish a substantial or undue hardship in order to receive a discharge (debt wiped out) of student loan debt in a Chapter 7 or Chapter 13 bankruptcy.  Undue hardship typically means that you cannot maintain a minimally adequate standard of living and repay the loan.  The rule, found in a New York bankruptcy case called Brunner vs New York Higher Education Services Corp., sets out a 3 part road map for discharging student loans in Chapter 7 bankruptcy.  

  1. You must prove that you cannot maintain, based upon current income and expenses, a minimal standard of living for yourself and your dependents if forced to repay the loan.
  2. Additional circumstances must exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and
  3. You must have made a good faith effort at repayment.

The definition of student loans now includes private student loans as well as the federally-guaranteed ones and most bankruptcy courts take a hard line on this test, making it extremely difficult to discharge a student loan in bankruptcy, but, in rare cases, possible.