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Doing the Splits:
Student Loan Discharges Face Undue
Hardship and Undue Review?
Annette W. Jarvis, Greenberg Traurig, LLP
Secretary, American College of Bankruptcy
Even when the Bankruptcy Code expressly invites the invocation of the equitable powers of the bankruptcy court, most circuit courts seem to like to apply tests to limit those powers. This proclivity becomes very clear when looking at the circuit split on the meaning of “undue hardship” when determining whether the bankruptcy court erred in ruling that a student loan can be discharged. Interestingly,
bankruptcy courts, which come face to face with the debtors and the facts comprising their undue hardship and dire circumstances, tend to be more likely to find the existence of “undue hardship” while the circuit courts, reviewing a cold record, rarely sustain a finding of undue hardship, and take a much more disassociated approach to the dreadful stories of distress.
Section 523(a)(8) provides that a student loan is only dischargeable if it “would impose an undue hardship on the debtor and the debtor’s dependents.” The application of undue hardship has produced two different, although somewhat overlapping, tests among the circuits, with the main difference being the flexibility of the tests. The Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth, and Eleventh Circuits follow the less flexible, three-part test first introduced in 1987 in Brunner v. New York State Higher Educ. Serv., 831 F.2d 395 (2d Cir. 1987), subsequently known as the “Brunner test.” The Eighth Circuit developed a somewhat more flexible alternative “totality of the circumstances test” in 2003 in In re Long, 322 F.3d 549 (8th Cir. 2003), which has been followed by the First Circuit Bankruptcy Appellate Panel, with the First Circuit yet to weigh in on the split. The Tenth Circuit has adopted the “Brunner test,” but with an explanation of the application of the test that moves it somewhat in the direction of the “totality of the circumstances test.”
In a two page per curiam opinion, the Second Circuit in Brunner required a three part showing for a student loan to be dischargeable: “(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 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.”