The "Undue Hardship" test: The dangers of a subjective test in determining the dischargeability of student loan debt in bankruptcy.

Author:Keller, Rebekah

    In today's culture of living life on credit, post-secondary education loans have become the most popular method for American students to pay for their college degrees. Further, "[t]he costs for a higher education are among the fastest-rising costs in American culture today. Since 1980, tuition costs at U.S. colleges and universities have risen 757 percent." (1) With $1.2 trillion in current outstanding student loan debt, (2) approximately 43 percent of the 22 million Americans with federal student loan debt are not making payments on their loans. (3) In 2014, 69 percent of college seniors at public and nonprofit colleges graduated with some student loan debt. (4) Missouri students alone graduated with an average of $25,844 in student loan debt in 2014. (5) Coupled with the high unemployment rates of a recovering economy, student loan debt poses the greatest obstacle for young adults starting out on their own. (6) Such large amounts of debt can have a serious impact on the futures of these student debtors. In a recent policy analysis paper, Mark Kantrowitz, a nationally recognized expert on student loan debt and financial aid, found:

    [S]tudents who graduate with excessive debt are about 10% more likely to say that it caused delays in major life events, such a buying a home, getting married, or having children. They are also about 20% more likely to say that their debt influenced their employment plans, causing them to take a job outside their field, to work more than they desired, or to work more than one job. (7) One unique characteristic of student loan debt, compared with other types of debt that a consumer may take on, is its status as a non-dischargeable debt under the Bankruptcy Code. (8) Thus, student loan debt is not automatically dischargeable when debtors file for bankruptcy and receive a discharge of their other debts in a bankruptcy proceeding. (9) This creates a hardship for debtors who have come out of bankruptcy still saddled with massive student loan debt, leaving them with little hope they will ever rid themselves of their accumulated debt. (10)

    Even so, debtors continue to attempt to have their student loan debt discharged in bankruptcy. Because of the difficult standard put in place by Congress, commonly referred to as the "undue hardship" requirement, this requires some creative arguments on the part of these debtors to convince a court that their student loan debt imposes enough of a hardship that it could be categorized as "undue." (11) In addition to its non-dischargeability, student loan debt can impose different obstacles on borrowers, depending on whether the debt agreement is for federally or privately funded student loans. Even though neither federal nor private student loan debt is dischargeable in bankruptcy, their lasting effects on debtors can be very different. This Note explores the varying impacts that public and private student loan debt can have on borrowers both before and after a bankruptcy.


    Chelsea Ann Conway, a single college graduate, filed for relief under Chapter 7 (12) of the Bankruptcy Code in December 2009. (13) Ms. Conway received a discharge in March 2010, and her case was closed. (14) However, in December 2011, Ms. Conway filed a motion to reopen her case, which was granted, in order to determine whether her non-dischargeable student loans could be discharged under the undue hardship exception of the Bankruptcy Code. (15) In August and November 2012, two of the three creditors holding Ms. Conway's student loan debt filed stipulations to discharge the debt owed to them by Ms. Conway. (16) This left Ms. Conway with fifteen outstanding student loans that survived her Chapter 7 bankruptcy. (17) The fifteen remaining outstanding student loan debts continued to be disputed by the creditor in the case, National Collegiate Trust ("NCT"). (18)

    Ms. Conway's student loans comprised of debt amounts borrowed between 2003 and 2005 while she was enrolled in college at Webster University in St. Louis, Missouri. (19) Ms. Conway borrowed a total of $37,100 from NCT while attaining her bachelor's degree at Webster University. (20) She graduated from Webster University in 2005 with a Bachelor of Arts in Media Communications. (21) After attaining her degree, Ms. Conway enrolled at Saint Louis Community College and completed additional coursework. (22) In order to pay for these courses, Ms. Conway borrowed an additional $33,000 from NCT from 2005 to 2007. (23) In October 2005, Ms. Conway began a full-time job, but in July 2007, she was laid off (24) She began working part-time in temporary positions, while also receiving unemployment benefits. (25) Ms. Conway found full-time work again in December 2007 but was again laid off in September 2008 and again began receiving unemployment benefits while working in part-time temporary positions. (26) Since April 2009, Ms. Conway has been waitressing part-time at two restaurants. (27)

    Ms. Conway had an adjusted gross income of $21,115 in 2008; $16,127 in 2009; $25,256 in 2010; and $25,390 in 2011. (28) In her pleadings, Ms. Conway estimated her monthly income as of July 2012 to be $2461.45. (29) Ms. Conway had also received $625 in settlement proceeds in relation to a car accident in August 2012. (30) Ms. Conway reported her total monthly income at the time of her hearing to be $2040.36 and her total monthly expenses to be $1737.25. (31) This left Ms. Conway with a net monthly income of $303.II. (32) Since 2005, NCT had granted Ms. Conway part-time deferments, temporary forbearances, and forbearances on all fifteen loans. (33) As of 2012, Ms. Conway had repaid a total of $5734.48. (34)

    Ms. Conway further stated that she suffered from depression, anxiety, Attention-Deficit Disorder ("ADD"), scoliosis, arthritis, and other ailments that limited her ability to work. (35) Ms. Conway also stated that these ailments would continue to limit her future capabilities to maintain gainful employment. (36) Ms. Conway also asserted that, despite her best efforts, she was unable to find any kind of higher paying, full-time employment in the current job market. (37) Finally, she argued that her bachelor's degree in media communications was useless to her in finding gainful employment because it provided her with none of the skills, experiences, or expertise necessary for open positions. (38)

    In reopening her bankruptcy case, Ms. Conway relied on Brunner v. New York State Higher Education Services Corp., (39) arguing that her outstanding student loan debts should be discharged because they created an "undue hardship" on her and prevented her from receiving a fresh start once her Chapter 7 proceedings were resolved and closed. (40) Ms. Conway argued she was unable to repay over $118,500 in student loan debt on her current income and that, with her useless degree and ailments, the possibility of finding more gainful employment in the future that would allow her to pay these loans was unlikely. (41)

    The U.S. Bankruptcy Court for the Eastern District of Missouri granted Ms. Conway's petition to reopen her case in order to determine whether her student loan debt did in fact impose an undue hardship on Ms. Conway and should be dischargeable. (42) However, the court rejected Ms. Conway's argument that the court rely on the test set forth in Brunner (43) Instead, the court's analysis depended on the Eighth Circuit's "totality-of-the-circumstances" (44) approach to the undue hardship standard. (45) Based on this totality-of-the-circumstances test, the court found that Ms. Conway's reasonably reliable future financial resources, (46) combined with her reasonable living expenses, meant that Ms. Conway would be able to repay NCT in the future without an undue hardship. (47) Further, the court found that Ms. Conway's "written submissions to this Court evidence" that she "is articulate, poised, intelligent and quite capable... . [S]he undoubtedly has the education and transferable skills that will allow her to obtain a more lucrative career in the future." (48) The bankruptcy court also found that Ms. Conway's medical expenses, as part of her monthly living expenses, would likely be reduced by the addition of health insurance if she found a full-time job. (49) The court held that Ms. Conway's argument failed the totality-of-the-circumstances test, and thus her student loan debt continued to be non-dischargeable. (50)

    Ms. Conway appealed the bankruptcy decision to the Bankruptcy Appellate Panel ("BAP") for the Eighth Circuit. (51) The BAP reviewed Ms. Conway's case de novo (52) and ultimately reversed the bankruptcy court's holding and remanded the case to the bankruptcy court. (53) First, the BAP reviewed the facts provided to the bankruptcy court regarding Ms. Conway's income and expenses and concluded that nothing in the record controverted the bankruptcy court's finding of fact that Ms. Conway's current income was stable. (54) However, the BAP did not agree with the bankruptcy court as to Ms. Conway's "reasonably reliable future financial resources." (55)

    The BAP noted that Ms. Conway had not made much more than $25,000 per year in the eight years since she graduated from college, which indicated that Ms. Conway's case was not one where a debtor is intentionally underemployed. (56) The BAP also noted that, even though the bankruptcy court found that Ms. Conway had a net income, after expenses, of approximately $300 per month, the minimum principal and interest payment due to NCT is $846.16 per month. (57) The BAP ultimately held that "[w]hile Ms. Conway may have the 'possibility' of earning a higher income in the future, there is no evidence to support that possibility. [The court] will not substitute assumptions or speculation for reasonably reliable facts." (58) Based on this, the BAP found that the bankruptcy court's finding that Ms. Conway's possible future financial resources made it likely that she would be able...

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