Biden, The Brunner Test And “Undue Hardship

"Bankruptcy courts have not been friendly to student borrowers. That’s at least partly attributable to Biden. In 2005, “the Senator from MBNA,” so named for his close relationship with the credit card company that was also his largest donor, was one of 18 Senate Democrats who backed a successful Republican-led bankruptcy reform bill that stripped private student loans of bankruptcy protection amid an explosion of private loan debt.

“He is a zealous advocate on behalf of one of his biggest contributors — the financial services industry,” Sen. Elizabeth Warren, D-Mass., said of Biden at the time.

For his part, Biden argued the law was necessary to prevent abuse of the system by borrowers who could afford to repay some of their debt. He and other supporters of the bankruptcy bill claimed the legislation would enable private lenders to lower costs for people seeking credit. But both arguments were ultimately proven wrong — abuse was minimal and interest rates in general did not go down. Instead, the law resulted in a system that leaves borrowers with few options for relief.

Prior to the passage of the revised bankruptcy law, student loans issued by for-profit private entities could be erased under the Bankruptcy Code. Congress had stripped federal student debt of bankruptcy protection in the 1970s, but private loans were a different matter. The 2005 law removed those protections, requiring borrowers to show that compelled repayment of their loans would impose “undue hardship” on them or their dependents.

Proving undue hardship is difficult because the Bankruptcy Code does not define the term. In general, courts have found that it means borrowers are unable to repay their loans and maintain a minimum standard of living. To determine whether that is the case, many courts apply what has come to be known as the Brunner test.

Established in the 1987 case Brunner v. New York State Higher Education Services Corp, the Brunner test involves three requirements to prove undue hardship: The borrower must be unable to maintain a minimal standard of living for themselves and their dependents, the borrower’s financial status must be likely to continue for a substantial part of the repayment period, and the borrower must have made a good-faith effort to repay the loan debt.

Because of the subjective way different courts have applied the test, the requirements have proven to be a notoriously high bar to meet. Prior to the 2005 law, a showing of undue hardship had only been required to discharge federal student loans, which traditionally offered lower interest rates and greater repayment flexibility than private loans. Since private loans had no such cushions, the 2005 law expanding the Brunner to cover them proved to be punishing."