When I used to cite the statistic that the total amount of  U.S. student loan debt has ballooned up to $1.27 Trillion[note]http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/how-much-student-debt-is-out-there-20150807.html[/note], people would gasp in disbelief. Now it seems like common knowledge. Because Congress has enacted laws that provide significant protection to student loan creditors in the case of a borrower’s bankruptcy, paying back student loans is often referred to as the new indentured servitude. Since most student loan borrowers are not eligible to receive a bankruptcy discharge of their loans because of a seemingly insurmountable test to determine “undue hardship,” if you default your student loans, the federal government or private student loan lender can take collection actions against you for the rest of your life. But there are circumstances where people can discharge student loans, and it happens a little more often than you may think (though still not that often).

Brief History of Bankruptcy and Student Loans

Prior to 1976, student loans were not protected from being wiped out by a debtor’s bankruptcy. Due to an unrealistic panic from student loan lenders and their accompanying deep pockets and lobbying power, from 1976 to 2005, student loans became progressively more difficult to discharge.

  • 1976:   Before 1976, all student loans were dischargeable just like any other unsecured debt. Concerned over potentially high default rates of student loan borrowers, Congress enacted the first law to lay the groundwork for years to come. This law made is so that federal student loans would not be dischargeable for five years after origination. But a student could discharge loans earlier if an undue hardship was proven. [note]H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 466-75 reprinted in 1978 U.S.C.C.A.N. 5787).[/note]
  • 1984:   In 1984, Congress added private loans funded or guaranteed by a governmental unit or non-profit to the list of educational loans deemed non-dischargeable. Congress also deleted “higher education” from the language of the Bankruptcy Code, thereby treating all loans, even for highschool and elementary school, as nondischargeable. [note]Bankruptcy Amendments and Federal Judgeship Act of 1984 (P.L. 98-353)[/note]
  • 1990:   A seemingly minor change that extended the time a borrower could discharge student loans from five years after loan origination to seven years. [note]Crime Control Act of 1990 (P.L. 101-647)[/note]
  • 1998:   This was the year Congress truly failed our younger generation. The seven year waiting period was eliminated, and all federal student loans and private loans guaranteed by a governmental unit or non-profit are always nondischargeable. A borrower could still argue that payments would cause an undue hardship.[note]Higher Education Amendments of 1998 (P.L. 105-244)[/note]
  • 2005:   The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA – which ironically does nothing to protect consumers) passed and provided that ALL private student loans are now non-dischargeable regardless of whether they are made, insured or guaranteed by a governmental entity or non-profit.  If the interest paid on the loan is deductible under the Internal Revenue Code, it’s a student loan that can’t be discharged unless the debtor could prove an undue hardship if forced to repay the student loan.[note]The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8)[/note] Not surprisingly, many bankruptcy courts will even find debt obligations that are not truly “loans” (such as unpaid tuition and private tutoring bills) nondischargeable.

Is My Loan a Student Loan in the First Place?

Section 528 of the Bankruptcy Code is where you’ll find a list of debts that can’t be wiped out by filing bankruptcy. Debts such as those incurred through fraud, criminal restitution, government fines, child support, and, of course, student loans are all discussed. Section 523(a)(8) protects four categories of educational loans from discharge:

(1) educational benefit payments or loans made, insured, or guaranteed by a governmental unit;

(2) loans made under any program partially or fully funded by a government unit or nonprofit institution;

(3) an obligation to repay funds received as an educational benefit, scholarship, or stipend; and

(4) any “qualified educational loan” as that term is defined in the Internal Revenue Code.[note]In re Rumer, 469 BR 553, 561 (Bankr. M.D. Pa 2012).[/note]

Essentially, any loan in which the proceeds were meant to be spent on educational expenses (encompassing most private and federal student loans) is a student loan.

The cases interpreting § 523(a)(8) have held that the initial burden is on the lender to establish the existence of the debt and to demonstrate that the debt is included in one of the four categories enumerated in § 523(a)(8). [note]In re Rumer, 469 B.R. 553, 561 (Bank. M.D. Pa 2012) (citing Raymond v. Northwest Educ. Loan Ass’n (In re Raymond) 169 B.R. 67, 69-70 (Bankr. W.D. Wash.1994)); In re Keenan,53 B.R. 913 (Bankr. D.Conn.1985) (placing burden of proving that loan qualifies as a student loan “is consistent with the parties’ relative access to information”).[/note]

An educational benefit overpayment by a governmental unit or non-profit

An educational benefit overpayment made, guaranteed or insured by a governmental unit or a nonprofit is a simple concept to grasp. An “educational benefit overpayment” is an overpayment from a program like the Pell Grant or GI Bill, where students receive periodic payments but are not enrolled in school as required by such programs. [note]In re Johnson, 222 B.R. 783 (Bankr. E.D. Va. 1998).[/note] This type of obligation is narrowly construed and does not include receiving tuition from a school or any other debt that merely confers an educational benefit. [note]In re Renshaw, 229 B.R. 552 (2nd Cir. BAP 1999).[/note]

An educational loan/governmental unit or non-profit

Under this subsection, there must be a “loan” that is “educational”. For there to be a loan, there must be “(i) a contract, whereby (ii) one party transfers a defined quantity of money, goods or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date.”[note]In re Sokolik, 635 F. 3d 261 (7th Cir. 2001).[/note] This seems like a simple concept, but determining whether an obligation is a loan is a larger grey area than you may realize.

Is my Debt a “Loan”

loanThe most common scenario in determining whether an obligation can be defined as a loan is for unpaid tuition expenses to a school or university. Even though unpaid tuition is an issue that often crops up in this context, it is still relative to the small number of cases decided on the overarching issue of whether an obligation of a loan or not. A few courts have found if a student is allowed to enroll and take classes at a college and fails to pay the tuition, there is no “loan” obligation created and the unpaid tuition is dischargeable in bankruptcy as long as there is no proof that the student and school had an understanding or agreement in place that he would repay the funds to the school. [note]In re Renshaw, 229 B.R. 552 (2nd Cir. BAP 1999).[/note]

However, the 8th Circuit Bankruptcy Appellate Panel in In re Jonhson v. Missouri Baptist College[note]218 B.R. 449 (8th Cir. BAP 1998)[/note] decided that a student’s unpaid tuition was NOT dischargeable because it constituted an obligation to repay. The primary difference between the Johnson case and the Renshaw case is that the debtor in the Johnson case signed a promissory note (or a loan document) obligating him to pay back the school for the educational benefit he received.[note]In re Mehta, 262 B.R. 35, 43 (D.N.J. 2001).[/note] “The Panel concluded that the term does not require the exchange of funds between lender and borrower. By allowing the student to attend classes, the Panel observed, the college in effect advanced funds or credits to the student’s account, which the student drew upon by class attendance.”[note]218 B.R. 457.[/note] Another case with different facts would need to be decided by the 8th Circuit, but based on its very broad definition of a loan, even if the student did not sign a promissory note, it would seem the court’s decision would remain the same. The lesson here: if you live in a state covered by the 8th Circuit, you better pay your tuition.

The 1st Circuit also held that a student’s unpaid tuition was nondischargeabke because she signed a “Payment Agreement” promising to pay the university her unpaid tuition as a condition of her receiving her degree.[note]DePasquale v. Boston University School of Dentistry, 225 B.R. 830 (1st Cir. BAP 1998).[/note]The 1st Circuit Court held that “If a qualified institution or agency provides funds, credit, or financial accommodations to a debtor for educational purposes under a contemporaneous, mutual understanding of future repayment, the arrangement may be a loan within the statute’s meaning, whether or not funds, as such, were advanced.”[note]Id.[/note]. In other words, in the 1st and 8th Circuits, no funds have to change hands for the debt to be considered a loan under the Bankruptcy Code that is nondischargeable.

Fortunately, New York has now joined the 2nd Circuit and New Jersey in deciding that unpaid tuition is not a loan and is therefore dischargeable. [note]D’Youville College v. Girdlestone (In re Girdlestone), 525 B.R. 208 (Bankr.W.D.N.Y. 2015)[/note].

There is one Georgia bankruptcy case on the issue of whether unpaid tuition is an “educational loan” within the meaning of 523(a)(8) of the Bankruptcy Code.[note]Rabbi Harryy H. Epstein School, Inc. v. Goldstein (In re Goldstein), 2012 Bankr. LEXIS 6034 (Bankr. N.D. Ga. 2012).[/note] In this Georgia case, the Debtor had three children who attended The Epstein School, a private day school in Atlanta for children who are eighteen months old through the eighth grade.[note]Id.[/note] In February of 2011, the Debtor and the children’s mother entered into the Enrollment Contracts with the School for the 2011-12 academic year where they agreed to pay the school’s standard tuition for each child under its standard payment plans. In August of 2011, the Debtor requested “Alternative Terms” that would extend the payment schedule in exchange for his children attending the school during the year.[note]Id.[/note]

The Georgia Bankruptcy Court held that the Alternative Terms agreed to by the Debtor and the school were a “loan” because they included an agreement by the Debtor to repay an amount to the school in exchange for receiving an educational benefit for their children.[note]Id.[/note]. If there had been no agreement signed by the Debtor, I believe the result could have been different, but considering most schools are going to require the student or parent to sign an agreement to pay the tuition, most unpaid tuition in Georgia will likely be nondischargeable.
court of appeals map

Is My Loan “Educational”

Determining that a debt is a loan is not the end of the inquiry. It must also be “educational” in nature. Most courts, including the Courts of Appeals for the Fifth and Seventh Circuits, have analyzed whether a loan is a qualified educational expense (discussed below) or “educational” in nature by focusing on the stated purpose for the loan when it was obtained, rather than how the proceeds were actually used by the borrower. [note]See In re Sokolik, 635 F.3d 261, 266 (7th Cir.2011); Murphy v. Pennsylvania Higher Educ. Assistance Agency (In re Murphy), 282 F.3d 868, 870 (5th Cir. 2002).[/note] These courts have determined the educational nature of the loan by focusing on the substance of the transaction creating the obligation. [note]469 B.R. at 562.[/note] Courts have routinely held that a loan taken out for the purpose of funding a student’s education is nondischargeable, regardless of whether that student then goes on to spend the proceeds on items not related to a higher education (such as living expenses or luxury items).[note] Murphy, 282 F.3d at 870; see also In re Sokolik, 635 F.3d at 266; In re Noland, 2010 WL 1416788, *3-4 (Bankr. D.Neb. March 30, 2010); In re Hayes, 2006 WL 4481999, *4 (Bankr.D.Md. October 11, 2006); In re Nies, 334 B.R. at 502; In re Riley, 2005 WL 6443619, *5 (Bankr. N.D.Tex. June 17, 2005); In re Hamblin, 277 B.R. 676 (Bankr.S.D.Miss.2002); In re Roberts, 149 B.R. 547, 551 (C.D.Ill.1993); Barth v. Wisconsin Higher Educ. Corp. (In re Barth), 86 B.R. 146, 148 (Bankr. W.D.Wis.1988).[/note] Thus, “rather than trying to determine whether a computer purchased with loan money was used for schoolwork, personal use or some combination of both,” a bankruptcy court reviewing a § 523(a)(8) case “need only ask whether the lender’s agreement with the borrower was predicated on the borrower being a student who needed financial support to get through school.” [note]In re Sokolik, 635 F.3d at 266.[/note]

Obligation to repay an educational benefit, scholarship or stipend

bankruptcy and student loansThis type of obligation encompasses a situation where funds are loaned to students to assist them with their education in exchange for an agreement to fulfill a service obligation. If the student fails fulfill his service obligation the amounts advanced become repayable and are nondischargeable under section 523(a)(8)(A)(ii). [note]Burks v. Louisiana (In re Burks), 244 F.3d 1245 (11th Cir. 2001).[/note] Such obligations often involve medical students agreeing to serve underprivileged or rural areas.[note]See U.S. Dept. of Health and Human Servs. v. Smith, 807 F.2d 122 (8th Cir.1986) (holding that Smith’s debt to Department of H.H.S. incurred as part of the Physician Shortage Area Scholarship Program, whereby Smith received scholarship grants to finance his medical training in exchange for his agreement to practice medicine in a designated physician shortage area or to repay the amount of the grants plus interest, was non-dischargeable under § 523(a)(8)); In re Lipps, 79 B.R. 67 (Bankr.M.D.Fla.1987) (concluding that four loans given to Lipps by Rural Kentucky Scholarship Fund for tuition and expenses while Lipps was enrolled in medical school, in exchange for 1247*1247 Lipps’ agreement to practice medicine in rural Kentucky or other designated area or to repay the loans if he failed to fulfill his service obligation was a non-dischargeable educational loan under § 523(a)(8)).[/note]

Unfortunately, the bankruptcy case from the Northern District of Georgia mentioned above determined that tuition at the Epstein School, the private day school for young children, constituted an obligation to repay an educational benefit under this subsection.[note]Rabbi Harryy H. Epstein School, Inc. v. Goldstein (In re Goldstein), 2012 Bankr. LEXIS 6034 (Bankr. N.D. Ga. 2012).[/note] Even more alarming, a New Jersey Bankruptcy Court held that a loan for a private tutor for the debtor’s child was not dischargeable, reasoning that “it is enough that the debt at issue be ‘an obligation to repay funds received as an educational benefit.”[note]In Re Roy, No. 08-33318, 2010 WL 1523996, at *1 (Bankr. D.N.J. Apr. 15, 2010).[/note]

A Qualified Education Loan

In 2005, BAPCPA added “qualified education loans” to section 528 of the Bankruptcy Code to ensure that ALL private student loans were now nondischargable. In short, a non-dischargeable private student loan, cross-referenced with the IRS definition back to the Bankruptcy Code, is a “qualified education loan” incurred solely to pay “qualified education expenses” – defined as the “cost of attendance” at a  “qualified educational institution”.[note]26 U.S.C. 221(d)(1).[/note]

Here is the full text of 26 USC Section 221(d)(1): “Definitions: For purposes of this section – (1) Qualified education loan; The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses – (A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred, (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (C) which are attributable to education furnished during a period during which the recipient was an eligible student. Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).

You may be asking yourself “what’s a qualified higher education expense”? According to the Internal Revenue code, a ‘qualified higher education expense’ is the ‘cost of attendance’ at an ‘eligible educational institution.’ [note]IRC Section 221(d)(2).[/note]. More definitions!

The full text of 26 USC Sect. 221(d)(2): “Qualified higher education expenses – The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 108711, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of – (A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and (B) the amount of any scholarship, allowance, or payment described in section 25A(g)(2). For purposes of the preceding sentence, the term “eligible educational institution” has the same meaning given such term by section 25A(f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.

Cost of Attendance

The Internal Revenue Code does a fine job defining ‘cost of attendance’ as essentially tuition, fees, books, equipment, room & board, and miscellaneous personal expenses as determined by the institution (school).

Here is the statutory text of 20 USC Sect. 108711: “Cost of attendance: For the purpose of this subchapter and part C of subchapter I of chapter 34 of title 42, the term “cost of attendance” means (1) tuition and fees normally assessed a student carrying the same academic workload as determined by the institution, and including costs for rental or purchase of any equipment, materials, or supplies required of all students in the same course of study; (2) an allowance for books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for the documented rental or purchase of a personal computer, for a student attending the institution on at least a half-time basis, as determined by the institution; (3) an allowance (as determined by the institution) for room and board costs incurred by the student which – (A) shall be an allowance determined by the institution for a student without dependents residing at home with parents; (B) for students without dependents residing in institutionally owned or operated housing, shall be a standard allowance determined by the institution based on the amount normally assessed most of its residents for room and board; (C) for students who live in housing located on a military base or for which a basic allowance is provided under section 403(b) of title 37, shall be an allowance based on the expenses reasonably incurred by such students for board but not for room; and (D) for all other students shall be an allowance based on the expenses reasonably incurred by such students for room and board

Qualified Educational Institution

A “qualified education institution is a post-secondary school authorized to participate in the U.S. Department of Education Student Loan program. The formal definition is found in 26 USC 25A(f)(2): “Eligible educational institution – The term “eligible educational institution” means an institution – (A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and (B) which is eligible to participate in a program under title IV of such Act.

An eligible educational institution as “any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.” [note] IRS Publication 970.[/note]

You’ll find that most educational institutions of higher learning are eligible. Since high schools and elementary schools are not schools of higher education, tuition at these schools or loans to pay for such tuition would not qualify as a “qualified educational loan”, though such loans would likely qualify, as mentioned above, as an “educational loan” under a different subsection.

The problem with this subsection is that most courts are simply bypassing it and its complicated analysis and interplay with the Internal Revenue Code by simply finding that all private loans are “obligations to repay educational benefits.” [note]Carrow v. Chase Loan Serv., 2011 Bankr. Lexis 823 (Bankr. N.D. 2011); Rabbi Harry H. Epstein School, Inc. v. Goldstein (In re Goldstein), 2012 Bankr. LEXIS 6034 (Bankr. N.D. Ga. 2012); In Re Roy, No. 08-33318, 2010 WL 1523996, at *1 (Bankr. D.N.J. Apr. 15, 2010); Micko v. Student Loan Fin. Corp. (In re Micko), 356 B.R. 210 (Bankr. D. Ariz. 2006).[/note] Not all courts are succumbing to this mistake.[note]In re Oliver, 499 B.R. 617 (7th Cir. 2013).[/note]

Undue Hardship and Discharging Student Loans

If a student loan or other obligation falls within the language of Section 523(a)(8), the only way to obtain a discharge of the obligation is a finding of “undue hardship.” While undue hardship is not a defined term under the Bankruptcy Code, most courts follow a similar test.

The Brunner Test

The Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits follow the Brunner court’s test for undue hardship – a 2nd Circuit case from 1987 that doesn’t take into consideration the more restrictive laws now preventing private student loans from being discharged in bankruptcy. [note]Krieger v. Educational Credit Management Corp., 713 F.3d 882 (7th Cir. 2013); Spence v. Educational Credit Management Corp., 541 F.3d 538 (4th Cir.2008); Educational Credit Management Corp. v. Mosley, 494 F.3d 1320 (11th Cir. 2007) (emphasis added); Barrett v. Educational Credit Management Corp., 487 F.3d 353 (6th Cir. 2007); Educational Credit Management Corp. v. Polleys, 356 F.3d 1302 (10th Cir. 2004); In re Gerhardt, 348 F.3d 89 (5th Cir. 2003);  United Student Aid Funds, Inc. v. Pena, 155 F.3d 1108 (9th Cir. 1998);  Pennsylvania Higher Education Assistance Agency v. Faish, 72 F.3d 298 (3rd Cir. 1995); Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987) (the case that started it all).[/note]

Under § 523(a)(8), the debtor must prove “by a preponderance of the evidence each of the elements needed to establish that repayment of the [student] loans would cause [him/her] undue hardship.” [note]Dewey v. Sallie Mae, Inc. (In re Dewey), Nos. 05-00576 and 05-00684, 2008 WL 366004, at *1 (Bankr. W.D. Tenn. 2008).[/note] To evaluate undue hardship under § 523(a)(8), the Eleventh Circuit Court of Appeals in Hemar Ins. Corp. of Am. v. Cox (In re Cox)[note]338 F.3d 1238 (11th Cir. 2003)[/note], adopted the three-prong test articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp.[note]831 F.2d 395 (2d Cir. 1987).[/note] To demonstrate undue hardship under Brunner’s three-pronged test, a debtor must show:

(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 that 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 loan. [note]In re Cox, 338 F.3d 1238, 1241 (11th Cir. 2003).[/note]

Since the debtor carries the burden of proving each element of the Brunner undue hardship test, if the debtor fails to prove just one element, the inquiry ends and the student loan will not be discharged.[note]Id.[/note]

Minimal Standard of Living

In order for a debtor to show that a minimum standard of living cannot be maintained, the debtor must prove that she cannot pay for basic living necessities if forced to repay the loan. [note]See Ivory v. United States (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001).[/note] Another court has states that a  “’minimal standard of living’ relates to the smallest degree of income necessary to cover all expenses essential for daily existence.”[note]Rutherford v. William D. Ford Direct Loan Program (In re Rutherford), 317 B.R. 865, 878 (Bankr. N.D. Ala. 2004).[/note] Note the phrase “essential for a daily existence.” This is a VERY low standard of living. The Bankruptcy Court for the Northern District of Alabama identified six factors that it deemed necessary for a minimal standard of living in America, including:

  • shelter
  • basic utilities
  • food and personal hygiene products
  • vehicles and the costs associated with a vehicle
  • health insurance
  • some source of recreation.[note]Ivory v. United States (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001).[/note]

The Bankruptcy Court for the Middle District of Georgia utilized these factors in its analysis of a student loan dischargeability case and prior to its analysis of the facts, added: “[T]he Court must apply its common sense knowledge gained from ordinary observations in daily life and general experience to determine whether Debtor’s expenses are reasonable and necessary. If Debtor expends funds for items not necessary for the maintenance of a minimal standard of living or if Debtor expends too much for an item that is needed to maintain that minimal standard of living, then it is unlikely that, given Debtor’s present circumstances, the first prong of the Brunner test is satisfied where such overpayment would permit Debtor to cover the expense of her student loan debt without sacrificing a minimal standard of living . . . .”[note]Douglas v. Educ. Credit Mgmt. Corp. (In re Douglas), 366 B.R. 241, 253-54 (Bankr. M.D. Ga. 2007).[/note]

Additional Circumstances

Not only do you have to show that you cannot maintain a minimum standard of living if forced to repay your loan, but you must also show “additional circumstances” that indicate your inability to maintain a minimal standard of living for a significant portion of the repayment period. [note]In re Mallinckrodt, 274 B.R. 560, 566-67 (S.D. Fla. 2002) (quoting Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324, 328 (3d Cir. 2001)).[/note] In other words, even if you aren’t making much money now, if you have the potential to make more money in the future to allow you to maintain a minimal standard of living, your complaint will be dismissed.[note]Id.[/note]

Even worse, satisfaction of the second prong should be based on a “certainty of hopelessness.”[note]In re Douglas, 366 B.R. 241, 256 (Bankr. M.D. Ga. 2007); see also Downey v. Sallie Mae, Inc. (In re Downey), 255 B.R. 72, 76-77 (Bankr. N.D. Fla. 2000). [/note] You must present some evidence that your financial situation is not likely to improve. [note]Id.[.note]  So if you are older, have a limited education (which seems ironic given that we are trying to discharge student loans), and have potential medical issues, you may qualify to discharge your student loans. [note]See, e.g., Pa. Higher Educ. Assistance Agency v. Taylor, 334 B.R. 576, 585 (N.D. Ohio 2005).[/note]Fortunately, a finding that you are in bad health is NOT necessary to a determination of “hopelessness,” though it couldn’t hurt.[note]Id.[/note]

Good Faith Effort

There is one last hurdle to overcome if you hope to pass the Brunner test for undue hardship. You must show that you have made a good faith effort to repay your loans. Courts looks to your efforts to maximize income, obtain employment, and minimize expenses.[note] Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 402 (4th Cir. 2005).[/note] Furthermore, “the debtor may not willfully or negligently cause [her] own default, but rather [her] condition must result from ‘factors beyond [her] reasonable control.’” [note] In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993).[/note] Importantly, whether you have made or attempted to make payments is not dispositive, and the courts will evaluate your conduct in the context of your entire financial situation. [note]Nary v. Complete Source (In re Nary), 253 B.R. 752, 768 (N.D. Tex. 2000).[/note]

Partial Discharge of Student Loans

Some people have asked me if they can at least obtain a partial discharge of their student loans. The Tenth, Eleventh, Sixth and  Ninth Circuits have held that unless you receive a determination that repaying your student loans would cause you to incur an undue hardship, you cannot partially discharge your loans. [note] See In re Miller, 377 F.3d 616, 622 (6th Cir. 2004); In re Cox, 338 F.3d 1238, 1243 (11th Cir. 2003); In re Saxman, 325 F.3d 1168, 1175 (9th Cir. 2003); In re Alderete, 412 F.3d 1200 (10th Cir. 2005).[/note]

But in a recent 2013 case from the Ninth Circuit, the court used a more liberal standard for finding an undue hardship under the Brunner test and allowed a partial discharge of the debtor’s student loans even though the debtor’s wife refused to work and he had recently entered into a second car lease. [note] Hedlund v. Educational Resources Institute Inc., 718 F.3d 848 (9th Cir. 2013).[/note] The court looked at the debtor’s overall financial picture and balanced out certain higher than normal expenses (second car lease, non-working spouse) with a generally frugal lifestyle to find that at least some of his student loan debt should be discharged [note]Id.[/note]

Totality of the Circumstances Test

The Eighth Circuit prefers the less restrictive “totality of the circumstances” approach to a finding of undue hardship.  “Reviewing courts must consider the debtor’s past, present, and reasonably reliable future financial resources, the debtor’s reasonable and necessary living expenses, and ‘any other relevant facts and circumstances.’” [note]Educational Credit Management Corp. v. Jesperson, 571 F. 3d 775 (8th Cir. 2009).[/note] “Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt—while still allowing for a minimal standard of living—then the debt should not be discharged.”[note] In re Long, 322 F.3d 549, 553 (8th Cir.2003).[/note] It may sound like the Brunner test, but it’s far less burdensome. The biggest difference between the Brunner test and the 8th Circuit’s test is that there is no requirement in the 8th Circuit for the debtor to prove a complete set of 3 factors whereby failure to prove any one factor will automatically mean losing the case. [note]Id.[/note] This gives the bankruptcy judges significantly more leeway in determining whether an undue hardship exists. Even if the debtor would technically “fail” one of the Brunner factors, the same facts in the 8th Circuit could still lead to the student loans being discharged if the court determined that an undue hardship still exists after reviewing the debtor’s entire financial picture.

Chapter 13 Plan Confirmation, Student Loan Discharge, and the Espinosa Opinion

In 2009, the Supreme Court affirmed a decision from the Ninth Circuit where a debtor’s Chapter 13 plan called for his student loans to be discharged upon plan confirmation.  Remember that under Chapter 13, a debtor may obtain a discharge of certain government-sponsored student loan debts only if failure to discharge that debt would impose an “undue hardship” on the debtor and his dependents. 11 U.S.C. §§ 523(a)(8), 1328. The Federal Rules of Bankruptcy Procedure also require bankruptcy courts to make this undue hardship determination in an adversary proceeding, see Rule 7001(6), which the party seeking the determination must initiate by serving a summons and complaint on his adversary, see Rules 7003, 7004, 7008. In other words, te debtor must file a law suit within the microcosm of bankruptcy court to have the bankruptcy judge hold a trial to determine whether making the debtor pay back his student loan creditors would cause an undue hardship on his family.

The debtor in this case, Francisco Espinosa, filed a plan with the Bankruptcy Court that proposed to discharge a portion of his student loan debt, but he failed to initiate the adversary proceeding as required for such discharge. The creditor received notice of, but did not object to, the plan, and failed to file an appeal after the Bankruptcy Court subsequently confirmed the plan. Many years later, the student loan creditor filed a motion asking the court to hold its order confirming the plan void because is was in derogation of the Bankruptcy Code and Rules.

The Supreme Court ultimately held that the confirmation order was a final order and since the bankruptcy court’s mistake in allowing the case to be confirmed did not violate the creditor’s due process rights or render the order void, there was nothing the creditor could do.

So you may be asking, “why not have your bankruptcy attorney try to sneak in language in the Chapter 13 plan to discharge my student loans?” Not so fast. In the Espinosa decision, he Supreme Court gave the bankruptcy court that allowed the Espinosa plan to be confirmed a light slap on the wrist and made it clear that the Bankruptcy Code requires that bankruptcy courts have the authority—indeed, the obligation—to direct a debtor to conform his plan to the requirements of §§ 1328(a)(2) and 523(a)(8). [note]United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367, 1381(2009).[/note]

With this new directive, if a bankruptcy judge saw your attorney trying to sneak this by her, your attorney would likely be sanctioned by the court for abusing the code.

Chapter 13 Payment Plans and Priority Treatment of Student Loans

In Chapter 13, debtors are required to pay all their disposable income toward a plan that will disburse funds to creditors on a pro-rata basis (in proportion to the amount of the creditor’s claim when compared to the debtor’s total unsecured debt load). In Georgia, debtors are allowed to pay their student loan creditors directly to reduce the amount of disposable income they have to pay towards a Chapter 13 payment plan.[note]In re Webb, 370 B.R. 418 (Bankr. N.D. Ga., 2007).[/note] This is extremely favorable toward debtors since student loans are typically nondischargeable, and a requirement to stop making full direct payments on your student loans so that more money could be paid to dischargeable unsecured creditors would result in capitalized interest and possibly higher student loan balance and payments at the end of the Chapter 13 payment plan.

Even if a debtor’s projected disposable income is, for instance, $900 per month, and allocating $500 of that amount away from the debtor’s general unsecured creditors to his student loans would completely pay them off through the Chapter 13 plan, the debtor may be able to treat his student loan debt more favorably if he can show “special circumstances to the court to warrant such favorable treatment. [note]In re Knight, 370 B.R. 429 (Bankr. N.D. Ga., 2007).[/note]

Parting Thoughts

It may be tough to discharge your student loans, but it is possible. Maybe Congress will wake up and realize, at the very least, that being able to discharge private student loans will not result in some catastrophic crisis of all recent graduates purposefully defaulting on their student loans. Perhaps it would also be a wake-up call to private student loan lenders to curtail their predatory loan standards and cease lending $100,000 to 18-year olds fresh out of highschool with little regard for the financial consequences. The lesson to garner from this article is to borrow as little as you need to pay for your education. You’ll likely be stuck with these loans forever. If you have the choice between federal loans and private loans, I would almost always choose federal. While the federal government has more powerful collection remedies (garnishing pay without filing a law suit first) and federal loans are more difficult to discharge, federal loans also allow borrowers to enter into very forgiving repayment plans that private lenders don’t offer like IBR, ICR, and Pay As You Earn. Discharging your student loans may seem like an insurmountable obstacle, but it is possible, and it’s even been accomplished in a Georgia bankruptcy court. [note]In Re: Gordon v. US Department of Education, AP 07-9049 (N.D. Ga 2008).[/note]