BACK TO BANKRUPTCY'S EQUITABLE ROOTS: RECALIBRATE THE DISCHARGEABILITY OF STUDENT LOANS THROUGH A MODIFIED EIGHTH CIRCUIT APPROACH.

• Author: Ha, Terry

INTRODUCTION: THE NONEXISTENT LEGAL RELIEF FOR THE STUDENT LOAN CRISIS

In 2004 our nation's student loan debt stood at $345 billion. (1) Today, the student loan debt has more than quintupled, swelling to over $1.7 trillion (2) borrowed by over forty-four million past and current American students. (3) Student loan debt is larger than credit card debt (4) or automobile loan debt (5) and has serious consequences for the student debtor. The looming debt has forced 40% of student debtors to delay major purchases, such as a house or car, and caused more than a quarter to move back in with their parents or family members. (6) A similar percentage of student debtors have even delayed necessary further education they need. (7)

The relief available to student debtors under the United States Bankruptcy Code (Bankruptcy Code) is governed by [section] 523(a)(8). Under [section] 523(a)(8), a debtor may have their student loan debt discharged only if preventing the discharge of the student loan debt would impose an "undue hardship" on the debtor and the debtor's dependents (8) (Undue Hardship Exception). (9) Because Congress has not provided a definition of "undue hardship," the judiciary has been tasked with creating judicial standards to delineate the Undue Hardship Exception.

Currently, the leading majority standard is the three-part Brunner test CBrunner Test), which requires the debtor to demonstrate: (1) an inability to maintain minimal standard of living for himself and his dependents; (2) that additional circumstances exist indicating that the minimal standard of living will persist for the student loans' repayment period; and (3) that good faith efforts to repay the loans have been made by the debtor (Good-Faith Prong). (10) This standard employs an all-or-nothing discharge approach, meaning that the bankruptcy court must discharge the debtor's entire student loan debt or none of it--the court has no ability to discharge a portion of the student loan debt. (11) The Brunner Test emerged out of a modification of the once-leading Johnson test (Johnson Test), which contained: (1) a mechanical test; (2) a good faith test; and (3) a policy test. (12) The once-widely-utilized Bryant Poverty test (.Bryant Poverty Test) attempted to inject an element of objectivity into the Johnson Test by using the federal poverty guidelines as a basis for the debtor's financial situation. (13) The current minority standard is the Eighth Circuit's totality-of-the-circumstances test (Totality of the Circumstances Test), which "examines all of the circumstances surrounding a debtor's financial situation to determine whether a debtor qualifies for the [Undue Hardship Exception]." (14)

This Note examines the bankruptcy courts' attempt to satisfy the Undue Hardship Exception through the application of these four judicial tests. Through an analysis of each test's shortcomings, this Note makes apparent the reasons why it is imperative for Congress to provide a definition of "undue hardship." Not only have bankruptcy judges often bemoaned the duty to define "undue hardship," (15) but the four judicial tests employed by differing circuits have also created a lack of uniformity and consistency as to what constitutes "undue hardship" and, ultimately, whether a debtor is entitled to the discharge of their student loan debt. (16) For example, a debtor residing in New York City will experience a much harder time establishing undue hardship than a debtor residing in St. Louis due to the different tests applied by the respective circuits. (17) As it is unlikely that Congress will provide a definition of "undue hardship," this Note proposes a new test to be adopted uniformly by the bankruptcy courts for the Undue Hardship Exception. A test that is adopted uniformly by all circuits will bring much needed consistency for both the bankruptcy courts and the debtors who seek discharge. This Note's proposed test relies primarily on the current minority standard--the Eighth Circuit's Totality of the Circumstances Test--bolstered with additional factors and considerations.

This Note proceeds in three segments. Parts I and II provide the legislative histories of the Bankruptcy Code and of [section] 523(a)(8), respectively. The Note will contextualize the nature of [section] 523(a)(8) by the various amendments to the Bankruptcy Code and the general principles upon which bankruptcy law is founded.

Part III opens by describing Congress's failure to provide a definition for the Undue Hardship Exception. Then Part III discusses the various Undue Hardship Exception tests. The judiciary's consequent attempt to construct an adequate standard for the Undue Hardship Exception begins chronologically with the misguided Johnson Test. The Bryant Poverty Test follows with its laudable, yet flawed, effort to inject an element of objectivity to help address the Johnson Test's shortcomings. The current standard followed by a majority of the circuits, the Brunner Test, is then examined in depth. This section closes with the current Eighth Circuit's minority approach of the Totality of the Circumstances Test.

Part IV proposes a new standard for the federal judiciary to utilize in determining whether a student loan debtor has satisfied the Undue Hardship Exception. With an emphasis on bankruptcy's equitable nature, this Note's proposed test modifies the Totality of the Circumstances Test in three principal ways. Each modification is provided an explanation and analysis that helps demonstrate why the proposed test is superior to both the Brunner Test and the Totality of the Circumstances Test.

Finally, the Note concludes with a brief summary of the inadequacies of the Brunner Test and the Totality of the Circumstances Test that this Note's proposed approach attempts to remedy. As a result, this Note advocates for the uniform adoption of the proposed approach throughout the federal judiciary to provide the much-needed relief by American debtors.

1. HISTORY OF THE BANKRUPTCY CODE: THE CONGRESSIONAL JOURNEY LEADING TO THE NEAR-IMPOSSIBLE UNDUE HARDSHIP EXCEPTION

   Currently, the Bankruptcy Code is codified in Title 11 of the United States Code and is subdivided into nine chapters. (18) The United States Constitution grants Congress the power to enact "uniform Laws on the subject of Bankruptcies throughout the United States." (19) However, for much of United States history, a uniform bankruptcy system did not exist. (20) Congress exercised its express power and passed bankruptcy acts in 1800, 1841, 1867, and 1874. (21) Yet, the early bankruptcy system's underlying administrative issues meant that each bankruptcy act was short-lived. (22) It was finally through the Bankruptcy Act of 1898 that Congress was able to establish a national bankruptcy system that would survive. (23) The Bankruptcy Act of 1898 survived because the act was not a response to "economically hard times and emergencies," like the earlier bankruptcy acts, but because largescale industrialization that expanded commerce warranted a comprehensive bankruptcy act. (24) The Bankruptcy Act of 1898 laid the foundation for today's bankruptcy regime. Namely, it created the idea of the fresh financial start principle, (25) which underlies modern bankruptcy law. (26) The fresh financial start principle, also known as the fresh start doctrine, functions "to give debtors a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt" (Fresh Financial Start Principle). (27) Ultimately, the Fresh Financial Start Principle warrants relieving debtors of their debt so that they can carry forward in their lives debt-free. The Fresh Financial Start Principle aims to further two additional fundamental policies: alleviation of debtor hardship and encouragement of participation in the economy. (28)

   The Amendatory Act of 1938--commonly referred to as the Chandler Act--amended the Bankruptcy Act of 1898. (29) The Chandler Act's fifteen chapters composed a far-reaching statute not only in its scope, but also its purpose. (30) Liquidation (31) provisions were extensively dealt with in the Chandler Act's first seven chapters, and the rehabilitation of various classes of debtors was encompassed in chapters eight through fifteen. (32)

   While there were more bankruptcy amendments passed between 1938 and 1978, (33) the next major revision came through the Bankruptcy Reform Act of 1978 (Act of 1978), which created today's Bankruptcy Code. (34) The Act of 1978 brought two fundamental changes. The first was the elevation of bankruptcy judges into the federal judiciary. (35) The second was the broad expansion of the bankruptcy court's jurisdiction. Prior to the Act of 1978, the predecessor of the bankruptcy court, bankruptcy referees "had no jurisdiction until there had been a reference by the district court to the referee" and "the [bankruptcy] referee's powers were at all times subject to review by the district judge." (36) Through the Act of 1978, "the bankruptcy court essentially [gained] original, but not exclusive jurisdiction over all civil proceedings arising within a bankruptcy case." (37) This expansion of the bankruptcy court meant that bankruptcy judges were now better equipped to exercise their equitable powers (38) to alleviate the honest debtor. The Act of 1978 was amended in 1984, 1986, and 1994. (39)

   Next, in 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). (40) BAPCPA aimed to prevent the perceived abuse of individual debtors seeking relief pursuant to Chapter 7 by shifting the individuals from Chapter 7 to Chapter 13 relief. (41) While a Chapter 7 liquidation generally discharges unsecured debt, such as credit card debt, a Chapter 13 bankruptcy prevents the dischargeability of such consumer loans. (42) Individual debtors, by being forced to file Chapter 13 bankruptcy, will have to "take personal responsibility...