Bankruptcy and Student Loans

Student loan obligations are presumptively non-dischargeable in bankruptcy absent a showing of “undue hardship.” 11 U.S.C. § 523(a)(8). A recent decision by the Ninth Circuit Court of Appeals may offer financially stressed student loan debtors a way out of their student loans. In Hedland v. Educational Resources Institute, Inc., the court ruled that a bankrupt law school graduate who accumulated $85,000 in student debt (with monthly payments of more than $800) was not obligated to repay the loans because he could not find a job with enought income to make the payments. After filing bankruptcy, the debtor commenced an adversarial proceeding seeking a partial discharge of his student loans. At trial, the Bankruptcy Court determined that the debtor satisfied the three-prong test for “undue hardship” and granted a partial discharge of all but a portion of his student loans. The District Court reversed and reinstated the entirety of the student loans. The Ninth Circuit held that the Bankruptcy Court’s findings under §523(a)(8) were not clearly erroneous and reversed the District Court’s order.

The Court of Appeals used the three-pronged test laid out in Brunner v. New York State Higher Educ. Services, 831 F. 2d 395 (2d Cir. 1987):  (i) the debtor could not have maintained a minimal standard of living, if required to repay the full loans, (ii) circumstances indicated that the debtor’s inability to repay his loans would persist into the future, and (iii) the debtor made a good faith effort to repay his loans. The Court found that the Bankruptcy Court had not made any errors, had examined the evidence, had used the Brunner test, and that the reversal by the District Court was wrong. The Court then remanded the case back to the District Court to reinstate the discharge which the Bankruptcy Court ordered.

For more on the topic, see the Brooklyn Law School Library copy of Discharging Student Loans in Bankruptcy by David J. Light (Call # KF1530.D4 L54 2009). Contents include Legislative history of student loan dischargeability; Discharging student loans under Chapter 7; Discharging student loans under Chapter 13.