Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Tuesday, May 19, 2015

Undue Hardship Tests - Objective or Subjective?

Undue Hardship Tests

Having myself taught college classes and created many tests as a method to prove the outcome of the lessons presented over a period of time; I found that one of the easiest tests to give and grade are true false tests. The nature of true false tests are that they are objective and generally measure the ability to determine whether statements are fact and usually are a declarative statement which can be judged as either true or false. In other words when there are only two possible outcomes.  By changing a word or phrase a question can easily be manipulated, and the statement either matches a statement previously presented or learned or it doesn’t. (The Instructional Assessment Resources (IAR) Web site, The University of Texas at Austin)

A multiple-choice test question provides more than two possible answers; again, only one of which is correct.  Often in a multiple-choice test the questions can be quite similar and only by careful analysis will the correct answer be determined. Most multiple-choice questions include wrong answers called “distractors”. Ibid.

The other category of test generally requires answering a posed question with an essay or written explanation rather than selecting one of a prescribed set of possible answers. Essay questions are known to be subjective, and while the test can help discover the general knowledge of the student, essay questions also require the preparation and a disclosure of “criteria” on how the test will be graded. In some written tests the objective is to be able to address the subject and be able to prove a point by presentation of facts, statistical analysis, and convincing arguments. With no black and white answer, a test requiring persuasive discussion is clearly subjective as it requires an interpretation that falls in-line with the test creator’s preconceived answer they were seeking. Ibid.

Which brings me to looking at the various tests used to determining “undue hardship” by the various circuit courts.

Undue Hardship

In order to discharge student loan debt, the debtor is required to provide proof that undue hardship exists or will exist in the future if the debt is excepted from bankruptcy discharge.

There is ample evidence that the definition of undue hardship remains not only a point of contention and discussion; this term continues to be subject of “much controversy today… a great deal of which is reflected in the historical debate in Congress that occurred when it considered enacting § 523(a)(8)”1.

The courts were left on their own to define what the legislators meant in 1978 by the term “undue hardship”; and for nearly 40 years the term is still the subject of countless debates, journal articles, and white paper presentations at Bankruptcy Conferences.

While the courts struggled to develop standards for defining undue hardship the legislators also made attempts to restrict the “perceived”2 abusive actions of student loan holders who would file for bankruptcy after graduating and basically get a free ride to a lucrative career with college degree.

In attempts to forestall this potential abuse on the federal student loan programs, the bankruptcy council enacting several changes to 11 §523(a) (8) One of those was to set a 5-year restriction, where debtors were prohibited to file for discharge if within five years of when the loan was due; and only if the filing was a Chapter 7. Finding these amendments a bit too lucrative, in 1990 Congress once more amended the ruling by extending the waiting period to seven years and forbidding discharges in Chapter 13. Eight years pass and once again Congress amends the law. “In 1998, Congress repealed the seven-year exceptions, forcing the financially troubled student to prove undue hardship no matter how long it had been since the time the loan became due.”3

Note: “At this point, it was clear that this “pattern of amendment represents an obvious tendency on the part of Congress to tighten the gaps through which students could avoid loan repayment"4 .Ibid

The last and most current change to the exception clause in §523(a)(8) was enacted ten years ago. in 2005. Under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Congress had ample opportunity to review §523 and could have at this point significantly amended the rule or even eliminated it altogether; rather legislators expanded the exception to include “any other education loan that is a qualified education loan.” Ibid
“Prior to 2005, the “undue hardship” exception applied only to loans “insured, or guaranteed by a government unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution” Ibid. 

The current debate now on Capital Hill is what to do about the current debt held by students who borrowed money to attend “for-profit colleges”.

Testing Methods

The Congress left the definition of undue hardship up to the bankruptcy courts. Prior to the mid 1970’s students were able to discharge student loan debt just like credit card debt or other unsecured debt. With the influence of media hype declaring graduates were filing for bankruptcy as soon as they had a degree and even before they had jobs, became the impetuous behind the 1978 legislation to make it more difficult for students within 60 months of graduation to file for discharge of the Federally granted loans.  This was the birth of the undue hardship clause being applied specifically to student debt. 
(Several sources pick one?) i.e. (B.J. Huey, Undue Hardship or Undue Burden: Has the Time Finally Arrived for Congress to Discharge §  523(A)(8) of the Bankruptcy Code?) or 
Copyright 2013 American Bankruptcy Institute. Please contact ABI at (703) 739-0800 for reprint permission).


One of the first cases to bring this conundrum to the bench was in re Johnson, No. 77-2033 TT, 1979 U.S. Dist. LEXIS 11428, at *20 (Bankr. E.D. Pa. 1979).  In Johnson, the Pennsylvania court looked to the 1973 Bankruptcy Commission Report for a definition of undue hardship. The report contained the following guide: “the rate and amount of his future resources should be estimated reasonably in terms of ability to obtain, retain, and continue employment and the rate of pay that can be expected. Any unearned income or other wealth which the debtor can be expected to receive should also be taken into account”.

As a result, the “Johnson Test” was one of the first “Tests” used to define and grade the term undue hardship as it relates to student loan debtors. In formulating the criteria for evaluating what constituted the ability to pay in the future, the court meted out a series of scenarios and “factors” that seemed to only create other scenarios that required answers; the result was a multiple factor examination, which in the end, made test quite cumbersome and complicated and “rendering the litigation burdensome”. Ibid (BYU Review)


Interestingly only eight years later, the same court who created the Johnson Test, rescinded the multiple pronged Johnson test. In Bryant v. Pa. Higher Educ. Assistance Agency (In re Bryant), 72 B.R. 913, 915 n.2 (Bankr. E.D. Pa. 1987), the court acknowledged that test criteria in Johnson was in essence a “complicated three-part progressive test, each level of which has numerous inquiries to be answered before proceeding to the next level” and therefore in Bryant the court declined to continue using the Johnson Test. Ibid.

In Bryant, the court adopted a more statistical approach to defining and determining undue hardship. Again seeking guidance from the commission report, the court looked to defining the term “minimal living standard” or as it is commonly called “the minimal standard of living”. The court looked at the comparisons of the minimum standard of living as it related to the “poverty level”. The court had difficulty defining the minimum standard of living but there were plenty of published statistics on the poverty level within the United States.  Quoting from the BYU article: “While it is unclear what exactly is meant by ‘minimal standard of living,’ the court felt that if a debtor was below the ‘poverty level,’ the debtor was certainly below the ‘minimal standard of living’. For this reason, the court created an ipso facto presumption that satisfying the ‘poverty level’ test automatically establishes “undue hardship.” In a further attempt to add objectivity to the test, the court held that the federal poverty guidelines should be used in making this determination” (emphasis added)

One problem remained to be solved, what then were the criteria for determining what constitutes a minimal standard of living for those living above the poverty level? In order to solve this equation, the court then stipulated that additional points need investigation; those benchmarks were labeled “unique and extraordinary circumstances”, and to assist in solving what constitutes undue hardship there must exist more evidence in regards to the debtor’s situation. The result was looking to a “totality of circumstance” and looking at the whole problem from a more analytical view.

In looking at which tests courts are using, the Eighth Circuit has adopted the “Totality of Circumstances Test”, and this test has been applied in the 1st and 13th Circuit Courts as well.
Besides the term Totality of Circumstances other courts have deemed a debtor to have reached the point of “a certainty of hopelessness”, perhaps for lack of words on how to describe the state of affairs of a debtor who has no way to ever get a ‘fresh start’ due to drowning under the sea of student debt.

For the most part, the remaining Federal Bankruptcy Court Circuits have "adopted" the three pronged "Brunner Test", and while this test attempted to define and construct an objective approach to defining undue hardship, it may in turn have opened a Pandora's Box requiring a truck load of documentation to prove the point, and set in motion a mind-set against allowing discharge without proving poverty exists and that the debtor is near death!


One test remains to be observed, and that is the “Brunner Test”.  This “three prong test” as it is referred to, was devised to clarify undue hardship in the case of Brunner v. New York State Higher Education Services Corp. Here the court established a 3-part objective that included answering the paradigms:
(1) that the debtor cannot, based on current income and expenses, maintain a ‘minimal’ standard of living for herself or her dependants if forced to repay the loans; (2) 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 loans.

The Brunner decision is now over 28 years old.  And there are some who think it not only is outdated but some courts are saying it "was not the case that should have been the poster child for undue hardship"   

Time for Testing Review?

In the present debate today, commentators who oppose § 523(a)(8) argue that the “undue hardship” rule is "unnecessarily harsh", denying debt relief to all but a few select debtors, and usually only to those with dependents and medical conditions that prevent gainful employment. At the same time, debtors with other kinds of debt are not laden with the task of proving undue hardship. This problem is compounded because courts have developed varying standards, and the subsequent lack of uniformity prevents student debtors from knowing beforehand if they might qualify for undue hardship.

1. BRIGHAM YOUNG UNIVERSITY LAW REVIEW 2011, issue 3, Article 10, Student Loans in Bankruptcy and the "Undue Hardship" Exception: Who Should Foot the Bill? Kyle L. Grant
2. Ibid
3. Ibid

Next Time: Riding Out the Storm - New Horizon?

Until Next Time

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