Student Loans in Bankruptcy

With the student loan market in the realm of one trillion dollars, many Americans are faced with a substantial student loan bill but are left underemployed or saddled with so much debt the individual works in a career to pay off the student loans but lacks personal fulfillment. [1]  One particular commentator has analogized the student loan market to the mortgage crisis of 2008. [2] 

Many individuals that are burdened with excessive debt can file bankruptcy.  However, student loans are special cases under bankruptcy law. Student loans are generally non-dischargeable absent an “undue hardship” under 11 U.S.C. § 523(a)(8). 

Undue hardship is not defined under the Bankruptcy Code.  The test for “undue hardship” in the 9th Circuit is the Brunner test that came out of the Second Circuit decision Brunner v. New York Higher Educational Services Corp., 831 F.2d 395 (2nd Cir. 1987).

The Brunner test requires the debtor to prove:

1.      The debtors cannot maintain a “minimal standard of living” based upon current income and expenses if forced to repay the loans;

2.      That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and

3.      That the debtors have made a good faith effort to repay the loans.

The Brunner test was decided in 1987 and is a dinosaur when it comes to today’s student loan market and the substantial amount of debt that students are burdened with.  However, the law remains in place and requires what one court has termed “certainty of hopelessness” in order to discharge the debtors loans. 

However, there is hope.  In a recent Bankruptcy Appellate Panel opinion, Roth v. Roth v. Educ. Credit Mgmt. Corp, Judge Pappas opined that the existence of an undue hardship is

"too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.

Congress has never defined the circumstances constituting the sort of undue hardship justifying the discharge of an educational debt under § 523(a)(8), apparently preferring that bankruptcy courts craft a working definition. While it might have been appropriate and helpful when adopted, respectfully, the Brunner test for determining undue hardship is truly a relic of times long gone." [3]

With the lack of flexibility in the current law, bankruptcy judges across the country are beginning to take a second look at the Brunner test in favor of other tests or have lessened the inflexibility of the Brunner test by a partial discharge. [4] In the 9th Circuit, a partial discharge, although not providing complete relief, can provide debtors with portions of their student loans discharged if the debtor can meet their burden of undue hardship. [5]  

As one publication has declared, “It's incredibly difficult – but not completely impossible – to discharge education debts.” [6] This should give individuals under the pressure of paying off their student loans some reprieve. As a recent survey has shown, generally, debtors have obtained moderate success in litigating the undue hardship standard. [7] 

Although there is some hope, what this means for each debtor is very fact intensive lawsuit in the bankruptcy court. This is started as an adversarial proceeding and almost always requires the debtor to go to trial to litigate the factual issues present in the Brunner test.

If you have questions about your student loans, or the dischargeability of student loans in bankruptcy, please contact our office to explain your options and determine if you are possible candidate for discharge under the undue hardship standard. 

[1] Rohit Chopra, Too Big to Fail: Student debt hits a trillion, Consumer Financial Protection Bureau, available at http://www.consumerfinance.gov/blog/too-big-to-fail-student-debt-hits-a-trillion/ (March 21, 2012). 

[2]Daniel A. Austin, The Indentured Generation: Bankruptcy and Student Loan Debt, 53 Santa Clara L. Rev. 329 (2013).

[3] Roth v. Educ. Credit Mgmt. Corp., 490 B.R. 908, 920 (9th Cir. BAP 2013) (Pappas concurring).  

[4]  In re Kapinos, 243 B.R. 271, 275 (W.D.Va.2000) (collecting cases).

[5] Hedlund v. Educ. Res. Inst. Inc., 718 F.3d 848, 853-54 (9th Cir. 2013).

[6] Betsy Mayotte, Debunking the Student Loan Myth, U.S. News Education- Student Loan Ranger, (August 13, 2014 10:00 am), http://www.usnews.com/education/blogs/student-loan-ranger/2014/08/13/debunking-the-student-loan-bankruptcy-myth.

[7] Rafael I. Pardo and Michelle R. Lacey, The Real Student-Loan Scandal: Undue Hardship Discharge Litigation, 83 Am Bankr. J. 179 (2008).