Several recent decisions demonstrate that courts are reconsidering the treatment of student loan debt dischargeability in bankruptcy under the “undue hardship” exception of section 523(a)(8) of the Bankruptcy Code. If the trend continues, the long-standing Brunner test may become a mere “relic of times gone by.” Roth v. Educational Credit Management Corp., 490 B.R. 908 (9th Cir. BAP 2013).

This change may result from recent efforts to make dischargeable a relatively small amount of hardship student loan debt at a time of exploding guaranteed loan debt in the United States. Educational loan debt has swelled to more than $1 trillion with little possibility of relief under the present bankruptcy law even to the most deserving. In context, student loan debt exceeds the amount Americans owe on their credit cards.

It is in this environment that lawmakers have introduced legislation to reverse a 2005 change in bankruptcy law that makes it difficult to discharge private student loan debts. Student loan debts are the only type of consumer loan debts not dischargeable bankruptcy. Federal student loans have not been eligible for bankruptcy discharge in since 1978. The reason: to safeguard taxpayer money. But the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 extended the ban to private student loans.  In 2005, the law was changed to give private student loans the same privileged bankruptcy status as government loans, even though private student loans typically have vastly different terms and fewer consumer protections. The process of revising the bankruptcy laws could take years.  As a result, it appears the courts are beginning to take on what Congress will not.

Section 523(a)(8) of the Bankruptcy Code prohibits a bankruptcy court from discharging student loan indebtedness “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.”  11 U.S.C. § 523(a)(8).  In Brunner v. New York Higher Education Services, Corp., the Second Circuit gutted the undue hardship exception by requiring a three-part showing that: (i) debtor cannot maintain, based upon current income and expenses, a minimal standard of living if forced to repay the loans; (ii) additional circumstances exist indicating debtor’s affairs are likely to persist for a significant portion of the loan repayment term; and (iii) debtor has made good faith efforts to repay the loans.  Brunner, 831 F.2d 395 (2d Cir. 1987).

After 25 years, several courts have recently questioned the viability of Brunner and concluded that some student loan indebtedness may in fact be dischargeable.  In Kreiger v. Educational Credit Management Corp., the Seventh Circuit asserted that Brunner created a “judicial gloss” on the phrase undue hardship that could lead Brunner to “supersede the statute itself.”  Kreiger, 713 F.3d 882, 884 (7th Cir. 2013).  Chief Judge Easterbrook, writing for the majority, reasoned that the Bankruptcy Code did not require a 53-year old unemployed debtor to forego a bankruptcy discharge by pledging to pay her student loan debt in perpetuity, assuming she might find employment eventually.  Id.  The court reasoned that if the Bankruptcy Code compelled such a result, “no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve.”  Id.  

Similarly, in Roth v. Educational Credit Management Corp., the Ninth Circuit reversed the lower court’s finding that a 64-year old debtor was required to enroll in a 25-year student loan repayment program.  Roth, 490 B.R. 908 (9th Cir. BAP 2013).  Notably, in his concurring opinion, Judge Pappas characterized Brunner as “truly a relic of times gone by” and called upon the Ninth Circuit to reconsider its adherence to Brunner in favor of a more flexible interpretation of “undue hardship.”  Id. at 921-23.

As recently as last month, the Ninth Circuit affirmed the bankruptcy court’s partial discharge of a debtor’s student loan burden due to a more relaxed determination of “undue hardship.”  Hedlund v. Educational Resources Institute, 2013 WL 2232325 (9th Cir. May 22, 2013).  The Ninth Circuit stressed that a debtor must make reasonable efforts to repay student loan debt rather than show extreme efforts to repay.  Id.  For example, the court concluded the debtor need not be required to move to another city or state due to low pay and underemployment in his area in order to qualify for a discharge of student loan debt.

These decisions demonstrate that federal courts are reconsidering the tough hurdles announced in Brunner.  Few disagree that students (and their parents) borrowing money for education have a social and legal contract to repay these loans.  However, it may not be possible for certain people with limited prospects to repay tens of thousands of dollars of student loan debt in the midst of a stagnant employment market.  Allowing relief to those few deserving individuals through bankruptcy, strictly but flexibly construing “undue hardship” seems both reasonable and necessary.  More work needs to be done to ensure that student loan repayment continues to be the norm and wholesale defaults do not lead to a new credit bubble.

About Weltman & Moskowitz, LLP:

Richard E. Weltman and Michael L. Moskowitz are co-founders of Weltman & Moskowitz, LLP, a business law firm serving New York, New Jersey and Long Island.  They concentrate on creditor’s rights, bankruptcy, commercial litigation, business divorce, partnership dissolution, and alternate dispute resolution, as well as on limited liability companies and corporations, including counseling, structure, governance, and preparing and negotiating many types of secured lending, leasing, shareholder, buy-sell, technology, and joint venture agreements. Melissa Guseynov is an associate attorney with the firm. Michael, Richard or Melissa may be reached at 212.684.7800 or 201.794.7500, or at, or