Select Page

A federal appellate case has the potential to make substantial changes to the way American bankruptcy courts handle student loans. Federal bankruptcy law does not allow courts to discharge student loan debt, unless the debtor can show that they and their dependents would suffer “undue hardship” if they were forced to repay the debt. 11 U.S.C. § 523(a)(8). The statute does not define “undue hardship,” so courts have had to apply their own interpretations. Most federal circuits have adopted the Brunner test, named for Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987), which uses a three-part test to establish “undue hardship.” The current case, Murphy v. Sallie Mae, et al., No. 14-1691 (1st Cir., Jun. 30, 2014), is in a circuit that has not expressly adopted any standard for “undue hardship.” This has made the case the center of a battle between consumer advocates on one side and student-loan lenders, with the support of the federal government, on the other.

The elements that a debtor must prove under the Brunner test made sense in 1987, but they are not necessarily as widely applicable in the world of 2015. A debtor must prove that they would not be able to maintain a basic standard of living, based on their current income and expenses, without discharge of the loans; that their current financial hardship is likely to continue for most of the repayment period; and that they have attempted to repay the loans in good faith. The second part of the test seems especially difficult, since it asks the court to predict the future, but the third part has also produced results that seem remarkably unjust.

The debtor in Murphy is 65 years old and has been out of work since he lost his job as the president of a manufacturing company in 2002. He has been unable to find work since that time. According to the district court that heard his case in 2014, he blamed his ongoing unemployment on his age and level of qualifications, as well as “the shrinking American manufacturing base.” Murphy v. Educ. Credit Mgt. Corp., 511 B.R. 1, 2 (D. Mass. 2014). From 2001 to 2007, he took out multiple loans, totaling more than $220,000, to finance his three children’s college educations.

He filed an adversary proceeding in his bankruptcy case, seeking a declaration that the loans were subject to discharge. The bankruptcy court ruled against him after a trial. Instead of the Brunner test, it used the “totality of the circumstances” test, by which the court must assess whether the repayment of the loans would allow the debtor to “maintain a reasonable, minimal standard of living.” Id. at 3; see also In re Long, 322 F.3d 549, 553 (8th Cir. 2003). The bankruptcy court denied the debtor’s motion, and the district court affirmed that ruling.

The case is now pending before the First Circuit Court of Appeals, which has not officially adopted an “undue hardship” test. Several amicus curiae briefs, including one brief by the National Consumer Law Center and one brief from an Emory University law professor, urge the court to adopt a less stringent standard, arguing that courts from Brunner onward have interpreted the statute too narrowly. In an amicus brief filed on behalf of the creditors, the United States Attorney’s Office suggests that the court should adopt the Brunner test.

Since 1997, bankruptcy attorney Devin Sawdayi has represented individuals and families in Los Angeles in Chapter 7 and Chapter 13 personal bankruptcy cases. To schedule a free and confidential consultation with a knowledgeable and experienced advocate, contact us today online or at (310) 475-939.

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