Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Wednesday, June 10, 2015

Undue Hardship - Updates Needed - 2015 and Beyond - Time for Change?

Undue Hardship - Updates Needed -

2015 and Beyond - Time for Change?

In my first look at Undue Hardship I gave a brief overview of the history and difficulty of defining what undue hardship is, and how the various courts have tried to develop "tests" to support their interpretation of the clause.

Looking back at what was published in regards to the "intent" we have the following statement from the Bankruptcy Commission.
"[Student loans] should not be dischargeable as a matter of policy before [the debtor] has demonstrated that for any reason he is unable to earn sufficient income to maintain himself and his dependents and to repay the educational debt. In order to determine whether non-dischargeability of the debt will impose an “undue hardship” on the debtor, 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. The total amount of income, its reliability, and the periodicity of its receipt should be adequate to maintain the debtor and his dependents at a minimal standard of living within their management capability, as well as to pay the educational debt."
The above statement gives us some idea about the "intention" of the legislature regarding the ability and effort expected from a college graduate in regards to repayment of a Federally backed student loan.  The first point speaks to the dischargeability being a "matter of policy".  Which if taken in respect to describe a general policy which up until this point was to "give people and businesses a fresh start when they can no longer pay their debts." (

In addition, the statement above did nothing to help clarify the clause "undue hardship" nor provide clear objective guidance to the 94 District Courts, and the 13 Circuit Courts (for appeals) who are charged with determining the outcomes of the various chapters of bankruptcies.

The above quote provides only legislative intent as to the original meaning of undue hardship. The analysis in the above quote is the starting point from which all of these tests are formulated. The undue hardship doctrine is an elusive standard. Courts have historically struggled to formulate tests for its application. As typically stated, student loans are exempt from bankruptcy "unless" excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents. 11 U.S.C. § 523(a)(8) (emphasis added).

As I write this today I want to remind you that this legislation was composed and enacted nearly 40 years ago.  A lot has transpired in forty years, and the Bankruptcy Judges, District Courts, Appeals Courts and even the Supreme Court continue to try and figure out "just when" an "Unless" is appropriate! 

Hundreds and perhaps thousands of cases later, the courts have attempted to define, test, and rule on the elusive meaning of what constitutes undue hardship for a student borrower, and at the same time continue to uphold the age-old right for any non-student debtor to get a "fresh start". The courts even call Bankruptcy the Fresh Start Policy.  Does it seem right that a business or private debtor who owes hundreds of thousands and even millions of dollars can file bankruptcy and every dime be discharged, the debts forgiven and the debtors walk away with a clean slate, while a student owing on student loans is held in contempt by the courts for even attempting to have a debt free life? No, it is not.

Next time I will explore some of the ways in which courts have ridden the wave of trying to find smooth sailing in what has been a stormy adventure - defining 11 U.S.C. §523(a)(8).
Perhaps when the torrent of uncertainty begins to be unfurled, a new horizon will arise?

Next Time: A letter to the U.S. Department of Education

Until Next Time