An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard

American Bankruptcy Law Journal, TheVol. 86 Nbr. 3, July 2012

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An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard

INTRODUCTION

Every week, it seems, newspapers publish profiles of recent graduates who cannot afford to pay back their loans.1 Given the sheer amount of outstanding federal and private student loan debt ($1 trillion)2 and the high tenyear default rate (10%),3 these profiles are representative of a substantial number of graduates. The recent recession has only further exacerbated the problem.

Generally, one solution to insurmountable debts is to declare bankruptcy. However, student loans cannot be discharged through normal bankruptcy proceedings.4 Instead, Congress requires debtors to file an adversary proceeding.5 During the adversary proceeding, debtors have the additional burden of proving that repaying their student loans would constitute an "undue hardship."n More specifically, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 states that a bankruptcy proceeding "does not discharge an individual debtor from any [educational] debt . . . unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents."7 Because Congress failed to define "undue hardship," courts have been forced to provide their own interpretations.8

Although judges devised numerous tests,9 in recent years, the Brunner standard has come to dominate the field. This test, first set forth in Brunner v. New York State Higher Education Services Corp.,10 requires the debtor to establish the following three elements:

(1) that the debtor cannot maintain, based on current income and expenses, a ""minimal" standard of living for herself and her dependents 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 loans; and

(3) that the debtor has made good faith efforts to repay the loans.11

Detailed treatment of these provisions can be found elsewhere.12 For present purposes, the reader need only know that the three prongs require the debtor to show (1) a current inability to repay the loans, (2) a future inability to repay the loans, and (3) a good faith effort to repay the loans.13 When interpreting these elements, many courts have held that the debtor must have more than "temporary financial adversity," but the situation need not be one of "utter hopelessness."14

The Brunner test has been officially adopted in nine circuits.15 The two holdouts are the First and Eighth Circuits. Whereas the Eighth Circuit employs a more holistic totality of the circumstances test,16 the First Circuit has not settled the issue, thus allowing lower courts to use either approach.17 Although the tests are doctrinally quite distinct, my analyses did not find any statistically significant differences between outcomes in Brunner cir...

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