523(a)(8): The Elusive Student Loan Debt Discharge

By Sam Gamer

This past summer, the total student loan debt owed by Americans crested up to $1.2 trillion. For those staring down their own slices of that staggering sum, the options available to pay it off can seem daunting. A lucky few of these former students might be able to find high-paying jobs that enable them to easily handle their debts. For most, however, the path likely includes some combination of sacrifice, payment plans, multiple jobs, and refinancing. And for those who have an appetite for uphill battles, an additional tool might make sense: bankruptcy.

The discharge of one’s debts is a hallmark of the consumer bankruptcy system. Whether filing for chapter 7 or chapter 13, the debtor emerges from the process with his debts forgiven. Well, most of them. Contained within section 523 of the federal bankruptcy code is a list of certain debts that, even in a bankruptcy context, a borrower can’t escape from. Student loans are on this forbidden list. Specifically, the law says that, unless the former student can prove that keeping the loans will impose an “undue hardship” on him or her, the loans will not be discharged even after a bankruptcy filing.

Despite the difficulty of discharging student loans in bankruptcy, former students have continued to try and convince bankruptcy courts that their loans are causing undue hardships. When confronted with these requests, the bankruptcy courts engage in a deeply personal and controversial probe of the debtor. A glance across the nation’s bankruptcy dockets shows the ongoing difficulties of discharging one’s educational debt.

In March of 2014, for example, a former student filed for bankruptcy in New Hampshire four years after receiving her bachelor’s degree at the University of New Haven in 2010. At the time, she owed nearly $109,000 on her student loans.[1] She was earning $16.75 per hour working as a legal assistant, and had never taken out a lease in her own name.[2] After noting this information, the New Hampshire bankruptcy court reviewed its interpretation of “undue hardship” and applied it to the student’s situation. In New Hampshire, and elsewhere within the First Circuit, one can only demonstrate an “undue hardship” by proving that their past, present, and reasonably future financial resources, after covering reasonably necessary living expenses, will not allow them to both pay the loans and maintain a minimal standard of living.[3] Applying this standard, the judge presiding over the student’s case, after pointing out that her income had been slowly rising during the preceding three years, denied the discharge of her student loans.[4]

Later that year, across the country in California, a former student also asked for a discharge of his educational loans as he filed for bankruptcy. Fifty-six-years-old at the time, and a licensed attorney, he had accumulated about $264,000 in student debt used to finance his college, business, and legal education.[5] Bouncing in between several locations and legal jobs throughout the 1990s and 2000s, this student had endured downsizings, temporary legal work, and layoffs.[6] At the time of his bankruptcy filing, he was earning $35 per hour representing applicants before the Social Security Disability Appeals board.[7] The California bankruptcy court, bound by the Ninth Circuit’s interpretation of “undue hardship,” examined the student’s case to determine (1) whether his income could support a minimal lifestyle while also paying the loans, (2) whether his situation was likely to change, and (3) whether he had made a good faith effort to pay the loans.[8] Finding that the former student satisfied each factor of this undue hardship test, the court discharged his student debt. The court based its decision upon the facts that he had no savings or retirement accounts to apply to his debt, he had historically attempted to pay off his loans when his income was healthy, and that, due to his age, his employment prospects were not strong.[9]

And in 2015, as part of their bankruptcy filing in Washington state, a husband and wife sought to discharge the wife’s nearly $73,000 in student loan debt.[10] The wife, thirty-three-years-old at the time, had borrowed the funds to attend college, where she ultimately received an associate’s degree.[11] The couple had a thirteen-year-old child, and the husband lacked health insurance.[12] Also subject to the Ninth Circuit’s interpretation of “undue burden,” the Washington bankruptcy court ultimately determined that the wife’s student loan debt was not dischargeable. The court based its decision on what it viewed as a lack of good faith efforts by the wife to pay back her loans.[13] Finding that the wife had not made “any meaningful” payments on her student debt over the past fourteen years, the court determined that her debt was disqualified from discharge.[14]

[1] Memorandum Opinion at 3, Abinoor v. SLM, Case No. 14-10606-BAH (Bankr. D. N.H. 2014).

[2] Memorandum Opinion at 3, Abinoor v. SLM, Case No. 14-10606-BAH (Bankr. D. N.H. 2014).

[3] Bronsdon v. Educ. Credit Mgmt. Corp., 435 B.R. 791, 798 (B.A.P. 1st Cir. 2010) .

[4] Memorandum Opinion at 16-17, Abinoor v. SLM, Case No. 14-10606-BAH (Bankr. D. N.H. 2014).

[5] Memorandum Decision After Trial at 2, Barrett v. U.S. Dep’t of Educ., Case: 14-04161 (Bankr. N.D. Cal. 2016).

[6] Memorandum Decision After Trial at 3-4, Barrett v. U.S. Dep’t of Educ., Case: 14-04161 (Bankr. N.D. Cal. 2016).

[7] Memorandum Decision After Trial at 4, Barrett v. U.S. Dep’t of Educ., Case: 14-04161 (Bankr. N.D. Cal. 2016).

[8] In accordance with the Ninth Circuit’s test for “undue hardship” as adopted in In In re Pena, 155 F.3d 1108, 1112 (9th Cir. 1998).

[9] Memorandum Decision After Trial at 8-9, Barrett v. U.S. Dep’t of Educ., Case: 14-04161 (Bankr. N.D. Cal. 2016).

[10] Memorandum Decision at 5, McCafferty v. U.S. Dep’t of Educ., 15-80015-FPC (Bankr. E.D. Wa. 2015).

[11] Memorandum Decision at 3, McCafferty v. U.S. Dep’t of Educ., 15-80015-FPC (Bankr. E.D. Wa. 2015).

[12] Memorandum Decision at 2, 18, McCafferty v. U.S. Dep’t of Educ., 15-80015-FPC (Bankr. E.D. Wa. 2015).

[13] Memorandum Decision at 24, McCafferty v. U.S. Dep’t of Educ., 15-80015-FPC (Bankr. E.D. Wa. 2015).

[14] Memorandum Decision at 21, McCafferty v. U.S. Dep’t of Educ., 15-80015-FPC (Bankr. E.D. Wa. 2015).