Discharging student loan debt in bankruptcy?
Just a few months ago, the U.S. Supreme Court declined to hear an appeal from a Wisconsin man claiming a bankruptcy court improperly denied the discharge of $260,000 in student loan debt because it found he wasn’t suffering from an undue hardship.
The Wisconsin man argued that it is easier to discharge student loan debt in the 8th Judicial Circuit and, as such, all federal courts should uniformly apply the standard used in that circuit. For those keeping score at home, Arkansas is in the Eighth Circuit and bankruptcy courts in that circuit do have the ability to use a more lenient standard when it comes to discharging student loan debt.
In a nutshell, the U.S. Bankruptcy Code states that one cannot discharge student loans unless he or she can demonstrate that paying them back would impose an undue hardship. What is an undue hardship? That has typically been determined by a three part test established in Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987):
- The debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to repay the student loans;
- 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
- The debtor has made good faith efforts to repay the loans.
The Brunner test is the one commonly used in judicial circuits around the nation and, generally, the finding that someone has a college degree means that person has leg up in the employment market. In other words, the fact a debtor piled up a lot of student loans in getting a college degree is often offset by the fact a person has a college degree and should be able to earn enough to avoid an undue hardship. That logic may be circular, but bankruptcy courts around the nation have used it for years.
One of those courts that applied that logic a Missouri bankruptcy court that heard in the case of Conway v. National Collegiate Trust. The court found the debtor had a college degree and, as such, should be able to find a job and pay back her student loans. She appealed that decision and a more lenient test resulted – the court looked beyond the Brunner test and decided to look to the debtor’s past, present and future to determine whether an undue hardship exists which should allow the borrower to discharge student loan debt. See Conway v. Nat’l Collegiate Trust (In re Conway), 495 B.R. 416 (B.A.P. 8th Cir. 2013) for more information about that test.
The Brunner test, then, is forward looking in that it is premised on the notion that someone with a degree should eventually earn enough money to pay off their student loan debt. The Conway test is more focused on the situation a debtor is in at the time he or she files for bankruptcy.
Of course, it is still difficult to discharge student loan debt in the 8th Circuit and each court determines whether an undue hardship exists on a case-by-case basis. Still, it is clear that the definition of what is an undue hardship when it comes to student loans in bankruptcy court may be evolving.
This column — part of the Practical Lawyer series — was authored by Ethan C. Nobles and originally appeared in the Jan. 25, 2016, edition of the Daily Record in Little Rock.