How the Courts Have Gone Astray in Refusing to Discharge Student Loans: The Folly of Brunner, of Rewriting Repayment Terms, of Issuing Partial Discharges and of Considering Income-Based Repayment Plans.

AuthorAhart, Alan M.

Under [section] 523(a)(8) of the Bankruptcy Code, an individual who obtains a bankruptcy discharge is not released from an educational debt unless excepting the debt from discharge would impose an undue hardship on the debtor and the debtors dependents. (1) To determine whether undue hardship exists, nine federal circuits (2) have adopted a specious test that was promulgated in 1985 by the federal district court in Brunner v. New York State Higher Education Services Corp. (In re Brunner) (3) and affirmed and adopted by the Second Circuit. (4) A recent law review article called this test "extremely difficult to pass." (5) Indeed, the test has become so onerous as to preclude debtors from seeking to discharge student loans. One study demonstrated that less than one-tenth of one percent of debtors with student loans file adversary proceedings seeking their discharge, because they believe the effort is futile. (6)

This paper demonstrates how the "Brunner test" misconstrues [section] 523(a)(8) and how courts ought to interpret this section when determining whether educational loans should be discharged in bankruptcy. Some courts in these same circuits have concluded that an educational loan can be partially discharged and/or restructured. This essay will also show how these courts have erred. Building from different law in two other federal circuits, this article provides the correct framework for determining whether an educational loan should be discharged. However, to fully appreciate this analysis, a short history of the discharge exception for educational loans and of adjustments to the federal student loan program is in order.


In 1970, Congress established The Commission on the Bankruptcy Laws of the United States (the "Commission"). (7) The Commission held numerous meetings and public hearings. (8) It drafted a report that included a proposed bill, known as the Bankruptcy Act of 1973, that it forwarded to Congress. (9) Among the bill's provisions was section 4-506(a)(8), under which a bankruptcy discharge extinguished all educational debts of an individual debtor except:

any "educational debt" if the first payment of any installment thereof was due on a date less than five years prior to the date of the petition and if its payment from future income or other wealth will not impose an undue hardship on the debtor and his dependents. (10) The Commission said that, to discharge an educational debt based upon undue hardship, "the claimant must establish that the debtor can pay the educational debt from future earnings or other wealth, such as trust fund income or an inheritance." (11) The Commission proposed a methodology to determine undue hardship: reasonably estimate the rate and amount of the debtor's future resources in terms of ability to obtain, retain, and continue employment and the rate of expected pay, taking into account any unearned income or other wealth that the debtor is expected to receive. In order for the student loan to escape discharge, the total amount of income, its reliability and periodicity of its receipt should be adequate to maintain the debtor and his dependents, at a minimal standard of living within their management capability as well as to pay the educational debt. (12)

When Congress considered this provision it limited the definition of an "educational loan" to loans insured or guaranteed by the federal government made by designated entities. (13) Congress also changed some other of the Commission's wording ever so slightly. Instead of stating that an educational loan is not discharged if its payment will not impose an undue hardship on the debtor and his dependents, the statute provided that such a loan is discharged only if the court determines that its payment from future income or other wealth will not impose an undue hardship on the debtor or his dependents. (14) Ultimately this statute was repealed and replaced by [section] 523(a)(8). (15) This time the language pertaining to undue hardship was changed more significantly: reference to dependents was changed back to the debtor and dependents and the phrase "payment from future income or other wealth" was deleted." (16) The legislative history does not address the reasoning behind these changes, but it seems clear Congress intended to broaden the scope of what constitutes undue hardship. Instead of simply focusing upon whether repayment of the loan from future income or other wealth will impose an undue hardship on the debtor, the inquiry was expanded to encompass whether the loan will impose an undue hardship on the debtor and the debtor's dependents. (17) The legislative history shows that [section] 523(a)(8) "... was designed to remedy an abuse by students who, immediately upon graduation, filed [a] petition for bankruptcy and obtained a discharge of their educational loans." (18)

Since 1978 Congress has repeatedly enlarged the reach of nondischargeable educational obligations by: 1) extending the five year repayment period to seven years in 1990 (19) and then eliminating it altogether in 1998, (20) (2) making educational benefits, overpayments, scholarships, stipends and specified educational loans from private lenders presumptively nondischargeable, (21) and (3) rendering educational debts presumptively nondischargeable in chapter 13 cases where the debtor completes payments under the confirmed plan. (22) In 2005 Congress amended [section] 523(a)(8) to substitute "would impose undue hardship" for "will impose undue hardship." (23) To paraphrase three bankruptcy professors, these statutory changes have not only expanded [section] 523(a)(8) to catch more fish in its nondischargeability net, but [section] 523(a)(8) has also been narrowed to keep the fish from escaping. (24)

As the ability to discharge student loans was being restricted, the federal government expanded the means of collecting them. The Deficit Reduction Act of 1984 generally authorized an offset against a debtor's tax refund for amounts owed to the United States. (25) Six years later, Congress passed the Federal Debt Collection Procedures Act of 1990 (26) establishing a comprehensive scheme for the judicial enforcement of most debts owed to the United States, including amounts owed on federally insured and guaranteed loans. In 1991 Congress eliminated the statute of limitations for collecting federal student assistance (27) and authorized the United States Department of Education to garnish up to 10% of a debtors disposable income to repay federally insured or guaranteed education loans. (28) In 1993 Congress authorized the making of generally available direct federal student loans and provided extended, graduated and income-based repayment plans therefor, with the income-based repayment plans having terms up to 25 years. (29) The Conference Report on this legislation noted the intent to include these direct loans within the discharge limitations of [section] 523(a)(8). (30) In 1996 a law was enacted providing for the offset of social security benefit payments to repay federal debts and effectively increasing the amount that could be garnished to 15% of the debtor's disposable pay. (31) In 1998 Congress created an extended repayment option of up to 25 years for new borrowers who accumulated at least $30,000 in specified federal loans. (32) Most recently, in 2015 Congress passed the Bipartisan Budget Act, which amended the Communications Act of 1934 to carve out an exemption from the general prohibition on "robocalls" for calls made solely to collect a debt owed to or guaranteed by the United States. (33)

The legislative trend is clear. Congress has made educational debts more difficult to discharge, significantly expanded the types of educational loans that will be nondischargeable, greatly lengthened the duration of these loans, provided several options for their repayment, and facilitated their collection from borrowers who do not timely repay them.


The District Court for the Southern District of New York decided Brunner in 1985. The debtor in Brunner obtained a bachelor's degree in psychology and a master's degree in social work over the course of ten years. She filed for bankruptcy about seven months after receiving her master's degree but before the grace period suspending payment of her $9,000 in educational loans expired. She had no dependents and her highest annual income for several years before bankruptcy was $9,000. Her rent was $200 per month. She received public assistance, food stamps and Medicaid. She had $200 in a bank account but shortly before her bankruptcy hearing she withdrew $2400 to buy a used car. The debtor was apparently unemployed; she testified that she had sent out more than 100 resumes in her chosen field of work, but was unsuccessful. She also said she did not have secretarial skills and that she had applied for any position she could find. (34)

To determine whether her educational loans should be discharged before expiration of the 5'year period, the district court promulgated a three part test, each element of which had to be satisfied in order to discharge an educational loan:

1) that the debtor cannot, based on current income and expenses, maintain a 'minimal' standard of living for himself or herself and his or her dependents if forced to repay the loans,

2) 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. (35)

The Second Circuit affirmed the district court in a per curiam opinion, (36) adopting this test in its entirety for the reasons set forth by the district court.

The district court described the evolution of this 3-part test. As for the first element, it quoted from the Commission Report and cited to two earlier cases--In re Johnson...

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