Over the past several years, more and more people are taking out ever-increasing amounts of student debt. With rising tuition rates and a greater push for advanced degrees beyond bachelors and technical degrees, it is not uncommon for graduates (as well as those who never even complete their programs) to come out of school with six-figure student loan debt.
The conventional wisdom regarding student loans in the realm of bankruptcy is that they are effectively non-dischargeable. This information is nothing new. However, an argument could be made for “undue hardship” as the basis for discharging this debt. Practically speaking, the “undue hardship” is a very high standard that is seldom accepted by the court.
The first difficulty rests in the fact that challenging the dischargeability of student debt requires an adversary proceeding, which is very expensive litigation that many debtors simply cannot afford. Assuming the debtor is willing and able to go forward, he then faces the hurdle meeting the “undue hardship” standard. The majority of jurisdiction use the test laid out in the Second Circuit case In re Brunner (831 F.2d 395 (2d Cir. N. Y. 1987)). It should be noted that this jurisdiction does not follow the Brunner test. The Brunner test requires a three-part showing:
First, that the debtor could not maintain a minimal standard of living for himself and his depends if forced to repay the loan; second, that additional circumstances existed indicating that this state of affairs would persist for a significant portion of the repayment period; and third, that the debtor had made a good faith effort to repay the loans.
In Brunner, the appeals court concluded that the debtor was not entitled to a discharge of her student debt because no “additional circumstances” existed showing she would be unable to find a job for a significant portion of the repayment period. Additionally, the court considered the fact that the debtor was not disabled or elderly, and had no dependents.
The case In re Vermaas (302 B.R. 650 (Bankr. D. Neb. 2003)) utilized a “totality of the circumstances” test for determining “undue hardship.” The court considered (1) the debtor’s total incapacity now or in the future to pay his debts, (2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance, (3) whether debtor’s hardship will be long-term, (4) whether debtor has made any payments on the student loan, (5) whether the debtor suffers from permanent or long-term disability, (6) the debtor’s ability to obtain gainful employment in his area of study, (7) whether debtor has made a good-faith attempt to maximize income and minimize expenses, (8) whether debtor’s dominant purpose in filing bankruptcy was to discharge student loans, and (9) the ratio of student loans to debtor’s total indebtedness.
The court went on to say that “the hardship must be more than mere unpleasantness. It must present a certainty of hopelessness and not a mere present inability to meet financial commitments due to a current, temporary state of unemployment.” In this particular case, the court denied discharge of the student debt because the debtor voluntarily took a lower-paying job than she was qualified for.
The 8th Circuit has rejected the Brunner test as too restrictive, and instead looks to the “totality of the circumstances” test when determining “undue hardship.” In In re Long (322 F.3d 549 (8th Cir. 2003)), the 8th Circuit held: “In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependents’ reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy.”
The Long court allowed a discharge where the debtor was older, had serious heart problems, depended on expensive medications, and was making an effort to work.
In light of these tests and considerations, the dischargeability of student loans ultimately comes down to the facts in each case. A law school graduate in her late 50s with a spotty work history and who had failed the bar exam in multiple states on multiples occasions was granted a discharge because she unlikely to ever work in her field of study (In re Wallace).
Discharge was also allowed for a debtor who was disabled and living off of VA benefits (In re Cumberworth), for a debtor over the age of 60 suffering from physical and mental conditions (In re Halverson), and for a debtor who had a mental condition, was unemployable, and homeless (In re Korhonen). Conversely, debtors who are in their 20s and 30s and working typically are not granted a discharge, even if they are under-employed, have multiple dependents, and six-figure debt loads (In re Desmond, In re May, In re Jesperson, In re Franklin).
In light of this case law, a debtor has to essentially prove to the court that he is never going to be able to pay back his student loans due to extreme circumstances beyond his control. This will seldom be the case with the overwhelming majority of bankruptcy clients, and thus dischargeability of student loan debt on the basis of “undue hardship” should not be considered as a realistic option.