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Student loans present one of the greatest challenges for debtors in Chapter 7 and Chapter 13 personal bankruptcy cases. Federal law prohibits the discharge of almost all student loan debt, except when a debtor proves that denying a discharge would cause “undue hardship” to them and their dependents. 11 U.S.C. § 523(a)(8). Most courts have interpreted “undue hardship” very narrowly, using the three-part Brunner test. See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987); In re Pena, 155 F.3d 1108 (9th Cir. 1998). While this has been the standard in most of the country for years, a few voices of dissent have emerged. A 2013 decision from the Ninth Circuit’s Bankruptcy Appellate Panel (BAP), for example, criticized the Brunner test as “too narrow,” stating that it “no longer reflects reality and should be revised.” In re Roth, 490 B.R. 908, 920 (BAP 9th Cir. 2013) (Pappas, J. concurring). Whether these voices have a lasting impact remains to be seen.

Most jurisdictions, including the Ninth Circuit, use the Brunner test, which requires a debtor to establish (1) that continued payment of the student loans would prevent them from maintaining even a basic standard of living, (2) that this state of affairs is likely to continue for the foreseeable future, and (3) that the debtor has attempted to make payments on the loans in good faith. Brunner, 831 F.2d at 396. Other jurisdictions use a “totality of the circumstances” test, which takes an individual debtor’s circumstances more into account. See In re Long, 322 F.3d 549 (8th Cir. 2003).

The “good faith efforts” requirement of Brunner can cause problems for debtors, since it invites a bankruptcy judge to second-guess how a debtor has prioritized debt payments before filing for bankruptcy. The term “good faith” is inherently ambiguous, which can also make it difficult to evaluate different debtors in different circumstances. This difficulty played a key role in the Roth case.

The debtor in Roth took out multiple student loans between 1989 and 1995 to pay for college. Some of the loans were administered by the Federal Family Educational Loan Program (FFELP), while others came directly from the Department of Education (DOE). She never completed a degree program, however, due to a “family issue.” Roth, 490 B.R. at 911. She worked in a wide range of jobs over the years, but she was eventually unable to work due to multiple medical problems, leading to her bankruptcy filing.

For some period of time prior to the debtor’s bankruptcy filing, the DOE garnished her wages to satisfy her loan payment obligation. She mistakenly believed that this covered all of her loans, not just the DOE loans. The bankruptcy court denied the discharge of the FFELP loans. It found that, despite having impressively established parts one and two of the Brunner test, the debtor failed to meet the third part because she had made no voluntary payments on the loans in question. The court apparently did not take the possibility of an honest mistake into account.

The BAP reversed the lower court, finding that other factors demonstrated a good-faith effort on the debtor’s part:  “1) remain[ing] full-time employed…often working two jobs; 2) us[ing] her job skills as productively as she could; and 3) liv[ing] frugally.” Id. at 919. One judge wrote a concurring opinion that strongly criticized the Brunner test, stating that “bankruptcy courts should be free to consider the totality of a debtor’s circumstances” when ruling on student loan discharge. Id. at 920.

Los Angeles bankruptcy attorney Devin Sawdayi has represented many individuals and families in Chapter 7 and Chapter 13 cases. To schedule a free and confidential consultation with a knowledgeable and experienced advocate, contact us today online or at (310) 475-9399.

More Blog Posts:

Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015

White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014

Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014