Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Wednesday, March 30, 2016



"Pay no attention to that man behind the curtain."  Wizard of Oz" 1939

I am very fortunate to have learned what is required to get out out from under the trap that I walked into when I believed a college degree would provide an open door to a great job!

The illusion perpetuated upon our society is that if you want to succeed in life then you will need a good education and need to go to college, study hard and earn a respectable G.P.A. (grade point average), and if you work hard... there will be employers lined up to offer you a great job with a nice benefit package, and an office with a view.

Shrouded within that illusion is the allure of becoming "a professional", and getting into one of those looked-up-to careers, like a Teacher, Engineer, Doctor or Lawyer.  Not just any career, but one with a title and prestige. 

To help sustain and artificially maintain this illusion, universities and colleges engaged in a very subtle "game of masquerade", complete with lots of masks, facades, pretenses, and even creating a party atmosphere to draw in the unsuspecting students and parents.

Strip away the masks and what you find is the face of a lucrative business called higher education!  If you do not understand this, then you have certainly fallen for the deception perpetuated by those who play this game so well, they have millions continuing to buy into the lie that without a degree you will never get a great job.  Take law students for example.

During my research to file bankruptcy to get a fresh start and stop the garnishment of my social security check for a loan who's interest grew faster than weeds in my mom's flower beds, I read case after case where the student loan debtor was a law student and even many a working lawyer who could not pay off their student loans.  Statistics do not lie, there are thousands of law graduates who find themselves buried in debt with no career in law!

Colleges oversold and continue to oversell the dream, the time for a wake-up is here!

Perhaps the most overused smoke and mirrors trick has been suckering college graduates into going on into law school?  Let me share some facts here....

The last reporting on the prospects of law students from the American Bar Association was published about a year ago in April of 2015.  However the reporting data was based on the previous year, 2014.  The ABA indicated that employment for graduates was up slightly from the previous year, 2013, but that is a bit deceptive based on the fact that the total number who graduated from law school was lower in 2014 than 2013.

The ABA article gave this statistical breakdown to explain what happened to these law graduates post ceremonies. 
  • "26,248 graduates of the class of 2014, or 59.9 percent, were employed in long-term, full-time positions that require bar passage.
  • 4,912 graduates of the class of 2014, or 11.2 percent, were employed in long-term, full-time "J.D. advantage" positions where a law degree is preferred.
  • 9.8 percent of the class of 2014 were unemployed and seeking employment."

  While at first glance the two top bullets seem to be impressive stats.  However, read them again then look at the last bullet... Nearly 10% of the 2014 graduates were NOT employed!

  Now compare that percentage to the national unemployment rate reported for 2014, which averaged 6.1 for the year. The class of 2014 saw nearly twice the rate of unemployment as did the national rate.

  The ABA also presented the stats for the year 2013 in their article, where there were more students....

   "The class of 2014 had 43,832 graduates, down 6.5 percent from 2013's largest-ever class of 46,776 graduates."

   The breakdown for 2013 was reported as follows:

"In the class of 2013, 31,368 graduates, or 67 percent, were employed roughly nine months after graduation in long-term, full-time positions where bar passage is required or a J.D. is preferred. The 2013 figures break down as follows:
  • 26,653 graduates of the class of 2013, or 57 percent, were employed in long-term, full-time positions that require bar passage.
  • 4,715 graduates of the class of 2013, or 10.1 percent, were employed in long-term, full-time positions where a law degree is preferred.
  • 11.2 percent of the class of 2013 were unemployed and seeking employment."

  Again while the ABA is trying to indicate the success of law schools in the 2013 stats, take a look again at the last bullet.  That 11.2 percent is again double the national unemployed rate. 

  OK... let me share another tale of what happens to a typical law school graduate.  Consider the plight of Jonathan Wang a 2010 Columbia Law School Graduate who passed and was admitted to the the New York State Bar, yet remains "under-employed" and who has since "turned to tutoring and law school advising to pay his rent and loans."  Source: Burdened with Debt, Law School Graduates Struggle in Job Market, Elizabeth Olson, New York Times, April 26, 2015.

  Olson provided Wang's experience this way: 
 "When he entered law school, the economy was flourishing, and he had every reason to think that with a prestigious degree he was headed for a secure well-paying career. He convinced his parents, who work in Silicon Valley, that he had a plan. “I would spend three years at school in New York, then work for a big law firm and make $160,000 a year,” said Mr. Wang, 29. “And someday, I would become a partner and live the good life.”
Mr. Wang, who works in Manhattan as a tutor for the law school admissions exam, is living a life far different from the one he envisioned. And he is not alone. About 20 percent of law graduates from 2010 are working at jobs that do not require a law license, according to a new study, and only 40 percent are working in law firms, compared with 60 percent from the class a decade earlier. To pay the bills, the 2010 graduates have taken on a variety of jobs, some that do not require admission to the bar; others have struck out on their own with solo practices. Most of the graduates have substantial student debt." ibid NYT
  The real dark side of the law school cloud is this... "Over all, nearly 85 percent of law graduates have taken out student loans" ibid: NYT.
  What is really frightening is the amount of money most of these law students borrow to get that "pie in the sky" degree!
  As Olson expounds, "2010 law graduates accumulated debt averaging $77,364 at public law schools and $112,007 at private ones."  The dollars are certainly higher now than 6 years ago - running closer to $90,000 for public schools and $115,000 for private law schools.

  Yet according to an article in the Huffington Post, Natalie Gregg wrote that while the number of new students was falling, the number of new law schools was on the increase!  Gregg put forth that in 1977 there were 177 law schools and in 2013  there are over 200.  She further reinforced the New York Times author's findings by stating: 
  "Although the American Bar Association‘s recent report might lead one to believe that while new graduates from 2013 have a stronger 88.8% employment level, the truth is that the devil is in the details. Among these, one of the more staggering statistics is that many of those law students who want to be lawyers are not able to secure full-time attorney positions. In this new era of the eroded value of a law degree, the ABA reports that only 57 percent of graduates were working in long-term time positions where bar admission is required. The sad fact is this: two out of every 2013 law school graduates is either unemployed or working in a job that has little to do with the fact that they went to law school."
Source: Mamas, Don’t Let Your Babies Grow Up to Be Lawyers, Natalie Gregg, Huffington Post, March 15, 2015.
So... What should a Law Student learn in law school?
Well, for starters (in my humble opinion) they should learn that #1 Education is a Business and they are out to make money from everyone that they can get signed up!  Next, prospective students should learn (or may I suggest) personal finance.  

Here I fault the educators... Colleges and Universities should be required to teach students about money and the cost of attending college BEFORE they enroll any potential student.

Law Students should be made aware of the enormous cost involved.  Not only for the classes and on campus expenditures, but made aware of the huge cost of taking the exam to pass the bar!  

In his most recent blog, my friend Richard Fossey wrote about this, and I quote: "I was amazed by how much it costs just to take the bar-exam review course--$15,000! When I went to law school (a long time ago, I admit), the bar review course cost only $600, which I paid in installments with money I made working as a part-time law clerk. If I were graduating from law school today, I would be forced to take out a sizable loan just to prepare for my bar exam."

Fossey was describing the plight of a law school graduate who was unsuccessful in passing the bar and now owes over $300,000.00 in student loans - and who has only been able to find work as a secretary making $49,000 a year! Will this gal ever be able to pay off $300,000.00?  I seriously doubt it.

That is why I want to add one more course to the law school curriculum... 911 for Student Loans. Students (and not just law students) need a course informing them of the trap they are about to step into!  This course would include stories of the perils of students who are in debt over their heads, did not get the job after graduation, and who are now debt slaves to the Department of Education and the U.S. Government!

For law students, I suggest that one of the required courses be Bankruptcy 101.

Because they need to know that there is a really good chance they are going to find themselves having to either file for themselves, or one of their graduating friends, once they rack up the total fees required to do the 5 to 7 years it takes to become a lawyer.  That is if they can afford to do the internships, pay for the bar exams, and pass the bar... Let alone find a good paying job! 

Fossey helped summarize the dilemma by pushing back the curtain and revealing the "Wizard of Oz"... he writes: 
"Greedy law schools and the American Bar Association created this crisis. The law schools set tuition levels far too high, and the ABA allowed law schools to admit far too many students.  As a result, thousands of law-school graduates share Leslie Campbell's predicament-- an onerous level of student-loan debt and no law job. 
The ABA and the law schools have a moral obligation to advocate for reforms in the Bankruptcy Code that will allow impoverished law-school graduates to discharge their student loans in bankruptcy. But we haven't heard a peep out of the law schools or the ABA regarding bankruptcy reform for student-loan debtors."
To put this into perspective... let me just say, if you are in financial crisis with a student loan, I completely and thoroughly am able to understand.  I was there!  But I was a good student and learned how to solve problems.  

The answer to my problem was filing bankruptcy and proving undue hardship.  I had no choice.  My education (while a great one) did not provide me the door of opportunity I had expected, and my life had some very serious setbacks, none of which I had much control over.

Today I am debt free, I am still living just above poverty, but the weight of that unpaid debt is no longer on my shoulders!  If I can help or encourage anyone in a similar situation, please allow me to say... I am happy to try.

God Bless!  Sincerely yours, Richard Allan Precht

Please leave any comments or questions, I will be happy to answer them.

For further reading:




Sunday, March 20, 2016



With Donald Trump continuing to be the front runner in the GOP race to the November 2016 Presidential election, it would be nice to understand his plan for dealing with the student loan crisis.  Nearing 1.3 trillion dollars in outstanding loans, the student debt financial nightmare is one that, if not addressed in the next administration, could well result in a catastrophic collapse, with world-wide consequences.

In searching the internet for the 2016 Presidential candidate's positions on the student loan crisis, there does not seem to be any "new" news!  The news outlets reported on the topic back in 2015 quoting several candidates who spoke publicly on the subject.

From an article in U.S. News & World Report dated October 28, 2015, reporter Betsy Mayotte shared the comments of then candidates Dr. Ben Carson, Hillary Clinton, Bernie Sanders, and Donald Trump.


Both Clinton and Sanders are on record pushing for a form of free education for aspiring students who attend community colleges and increased grants and financial aid packages for students in public colleges, espousing that "No family and no student should have to borrow to pay tuition at a public college or university, and everyone who has student debt should be able to finance it at lower rates."

Clinton's plan is estimated to cost $350 BILLION dollars!  And guess who is going to be billed for that?  Yes, an increased tax (she called it a "tax adjustment") of the wealthy!


In like terms Bernie Sanders has made big news by his stump speeches where he has promised "FREE COLLEGE" for everyone "by requiring public colleges and universities to meet the financial need of the "lowest-income students."
"Under this plan, low-income students would use state, federal and institutional aid to cover tuition, living and other expenses. He would also like to see an increase in federal aid programs, on his campaign website specifically calling to "more than triple the federal work-study program to build valuable career experience that will help them after they graduate." Mayotee

Again we see that Sanders is having the taxpayer receive the bill for education - in this case increasing the tax on what Sanders calls "wall street speculators" 

Hmm... So when the Wall Street Speculators are unable to continue to fund the Department of Education, do they get to file for bankruptcy and have the U.S. Government bail them out  (AGAIN?).

Mayotte's article from October was written last fall when there were many more candidates in the race, and as she stated "Since there are almost too many hopefuls to count right now, we'll just focus on the current top two from each party."  (So Mayotte chose Clinton, Sanders, Carson and Trump in her expose.)


The GOP candidate Carson who has now dropped out of the race, had some pretty interesting views on the subject.  As Mayotte writes in her article:
"Republican candidate Dr. Ben Carson has somewhat of an opposite view. His solution for paying for college comes in the form of existing Pell Grant funding and, as he noted during a 2014 interview, "there is a four letter word that works extremely well, it's called w-o-r-k, work."
In a more recent interview, he expands his position to say that while student loans are OK, their interest rates are not. He says that schools should carry part of the responsibility of student loan debt by paying for the interest on the loans for the students they enroll.
In a more official statement on education, Carson criticizes the federal Department of Education, but unlike other Republican candidates who have called for it to be eliminated, Carson would like to use the department to "monitor our institutions of higher education for extreme political bias and deny federal funding if it exists."
Dr. Ben was in my opinion, a good candidate who's common sense approach to many of the issues should be taken seriously and his statement about the rates of interest being charged is one I can fully agree with here.  I would also agree with Carson's proposal that colleges be the ones who pay that interest....  I say that based on the fact that colleges are raking in millions of dollars in super-high tuition and are paying outlandish salaries and bonuses to their Presidents and Administrators. (Not to mention millions of dollars being spent for sports programs!)


Now last but not least, we have the Trump position. The Donald is not one to mince words which is perhaps why he has become popular with a large portion of the voting public who are sick of Big Government and corruption at the highest levels. One does not have to search very far to find reasons to have those same thoughts in regards to the waste and abuse within the education system.  

While I would love to go on about the corruption that I feel lies at the root of the student loan crisis, I will hold my tongue for now and save those words for another time!

Trump seems to want to speak about this as well, but he too has tamed his rhetoric about the depth of the problem and not come forward with revelations of who really is benefiting from "the student loan BUSINESS".

From an article by Demetrios Sourmaidis wrote September 1, 2015 for Student Debt Relief dot com, Sourmaidis quotes "The Hill.Com"  in which Donald Trump spoke about the role of the Federal Government in education and the profiteering taking place.  Trump is quoted as saying: “That’s probably one of the only things the government shouldn’t make money off (of). I think it’s terrible that one of the only profit centers we have is student loans...."

Like Carson I agree with Trump.  The government is making money off of the student loan business and educational loans are even traded on Wall Street!  Banks pay you 1% and you or your kids pay loan shark rates for their education, only to discover that the promise of a great job based on a college diploma is just a pipe-dream in the year 2016!

Sourmaidis confirms the profiteering by the Feds and the Department of Education by stating:  "As we have reported in the past, the Federal Student Loan programs turned a profit of $41.3 billion in 2013 while many borrowers are struggling to make their financial ends meet."

A $41.3 Billion Dollar Profit?  And that was reported over three years ago - while costs of tuition and rates have continued to their upward spiral, and while college Presidents and administrations are being exposed for exorbitant salaries and all kinds of fraudulent activities and corruption!

Trump could win over many democrats - who according to "The Hill" stated: "Given that the majority of people who take out student loans are democrats- a very reasonable assumption- this opens a huge door for Trump.  25 million people struggling with their student loans, 18 million Democrats/Independents the majority of student debtors...."

The article from The Hill talks about Trumps "unique experience with bankruptcy" and espouses the possibility that Trump would push for changes to the current Bankruptcy laws which make it nearly impossible to discharge student loan debt.  Perhaps Trump would pursue a return to the pre-1978 statute where student loans were dischargeable just like any other unsecured debt?

The Hill's author Alan Collinge puts forth this idea on how Trump could win over some of those disenfranchised and desperate student debt holders.  Speaking about Trump's chance to draw them in he says: 
"(A)nd also because he is not beholden to either the beltway, or the Wall Street crowd, the student loan issue presents an opportunity unique to Trump, one that he could use to demonstrate that the “Invisible hand” of free market capitalism actually can work for the little guy. It would also deliver to him at least 9 million votes from people who would otherwise be disinclined to vote for him- and that is on the low side. Importantly, these would come with no losses from his Republican base. For Trump, this should be a no-brainer.  Its good conservative policy, great politics, and incidentally the right thing to do.

I agree.  Having successfully won a full discharge of nearly $130,000.00 on February 5th of 2016, I know full well the ramifications of being in debt to the student loan industry!  When the Department of Education began to garnish both my small federal retirement annuity and my social security check, and I was living at the poverty level, I knew I had to try and get that debt discharged.

Fortunately I prevailed.  But it was a year in the process and a lot of hard work.  In the end I won because the Bankruptcy law includes a clause called the Undue Hardship Provision.

That is why I am here and write these articles.  I began this blog when I discovered the provision and based on what I was learning I felt that the only way to get free of the student loan debt was that I would be totally broke, homeless and declared impoverished!

While I am still living near the poverty level, I am a strong believer that the winds are about to change, and those who are struggling with huge loan payments and ever increasing debt balances, can be free of that nightmare if they are seeking a fresh start.  I am starting to see that our courts and judges are not being so easily persuaded by the DOE's lawyers, and have in recent cases ruled in favor of the student debtor and against the DOE who have long been pushing their repayment plans.

In the recent case of a fellow, in California, the court discharged nearly $330,000.00 student loan debt under the 3-part Brunner Test, and had this to say about the DOE's attempt to get (the debtor) to agree to an income contingent repayment plan: 
"While the DOE correctly argues that this court must consider (the debtor's) failure to apply for one of its income-based repayment plans, such inaction is insufficient, standing alone, for this court to find against him on this final Brunner factor (particularly where no payment is forecast).... 
Given (the debtor's) other good faith efforts, his failure to pursue an income contingent repayment plan is not damning. An income contingent payment plan is not the functional equivalent of a Chapter 7 discharge, particularly given the possibility that a debtor may face a substantial tax liability when the student debt is forgiven.
(The debtor) has demonstrated by a preponderance of the evidence that he is entitled to discharge his student loan debt.  This court will therefore enter judgment in his favor."  (name of debtor withheld per his request)
Trump's popularity has a lot to do with his appeal to those disenfranchised and hurting Americans who are struggling to make ends meet.  He appeals to those who feel our Government has lost touch with those it claims to represent.  The Washington cartel does not like Trump because he is not part of their "click" and he may be elected - who knows?

Regardless of who is the next POTUS, the fact remains the student loan crisis is something that is desperately in need of help!  Students who are in debt and unable to repay their loans are in need of help.  That is what I am trying to do.... Help those who are in the same boat I was in, emphasis on the WAS!

Thanks for reading my blog.  If I can answer any questions feel free to comment here.  Also be sure and request email notifications of my latest articles here.

God bless America and You!  Best regards, Richard Allan Precht


Sunday, March 13, 2016

Early Tests to Prove (justify) Undue Hardship


If you are one who is following this blog I want to thank you. I first began blogging nearly a year ago now.  My very first attempt at publishing here was on May 19th, 2015.  The subject of that first informative posting was about Undue Hardship Tests.  The title I used to describe the subject in that initial blog was "Undue Hardship Tests - Objective or Subjective".  If you'd like, you can read the article here:

My very first article and blog attempt was borne out of frustration at a time when I was first researching how to discharge my nearly $130,000.00 student loan debt.  During my search for answers, I discovered the secret to being able to get out from under the burden of that huge debt and get a "fresh start" through filing bankruptcy. The secret was proving that my circumstance was an case of undue hardship.

I passed the test - And I won a full discharge of my student loan debt!

In my continuation of my recent blogging on the subject of proving undue hardship, I want to help you with understanding the conditions that must be met to satisfy the Bankruptcy Court's standards and various tests they created in an attempt to define and litigate cases under rule 11 U.S.C. §523(a)(8). 

As you may recall from my previous postings, the U.S. Congress passed legislation which added student loans to the type of debts that could not be discharged by filing bankruptcy in any U.S. Bankruptcy Court.  There are several types of debts which are not allowed to be discharged via bankruptcy, and these are what are called the "exceptions to discharge" and some of these certain debts can be challenged in court under certain circumstances.  It just so happens that debts incurred to finance education can be challenged. Reading the law carefully reveals one word which opens the way to allow a challenge to the "exception to discharge rule".  That word is 'unless'.

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.  - See more at:

Several changes by Congress over the years have actually made it more difficult to get student loans discharged through bankruptcy.  The perception remained that students were going to take advantage of the right to file bankruptcy and "stiff the government" and get a 'free education' at the taxpayers expense. Congress first raised the waiting period from 60 months to (7) seven years.  When that change appeared to not stem the tide of filings, the Congress eliminated wait periods altogether in 1998.
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.” Ibid

The real test surrounding discharging student loans in bankruptcy fell to the definition of what Congress allowed as the "unless clause", and that definition was left for the individual courts and judges to figure out.  Needless to say it created a whole new world of problems!

Here is the context under which we find the "unless" of  the bankruptcy law

11 U.S.C. §523
(a) A discharge under §727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt—
(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non-profit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.


The challenge before judges was to try and determine what the Congress was saying by its enacting of the legislation to attempt to put stop gaps in place to curb a perceived rash of bankruptcies by unscrupulous college graduates.

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. Ibid

In re: Johnson

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


The following description of the 1st real test of Undue Hardship is one I found within an article published by the American Bankruptcy Institute.  (Source below)

 "The Johnson test divided its inquiry into three distinct components: a "mechanical" test, a "good-faith" test and a "policy" test.27

1. Mechanical Test. The court must ask: Will the debtor's future financial resources for the longest foreseeable period of time allow for repayment of the loan and be sufficient to support the debtor and his dependents at a subsistence or poverty level standard of living, as well as to fund repayment of the student loan? If the question is answered affirmatively, discharge of the loan must be denied. If answered negatively, then the court must apply the good-faith test.

2. Good-faith Test. Here, the court asks two questions: If the answer to the first part of the good-faith test is no, then the debtor should be discharged of the obligation to repay his student loan. However, if the answers to both parts of the good-faith test are "yes," then a presumption against discharge is established—which may be rebutted by a negative answer to the third and final test.

3. Policy Test. The court must ask: Do the circumstances—i.e., the amount and percentage of total indebtedness of the student loan and the employment prospects of the petitioner—indicate:If the answer to both parts of this question is a firm "no," then the debtor should be discharged from his student loan obligation. If the court answers "yes" to either part of the question, then the discharge should be denied.28

As the foregoing quotation illustrates, the Johnson test is rather complex. Nevertheless, it contains several aspects worth retaining. For example, it requires the court to look at whether the debtor's foreseeable income would allow for reasonable support and payment of the loan, and it requires the court to examine the reason for the debtor's alleged hardship (i.e., whether the debtor engaged in negligent or irresponsible fiscal decision-making). The presumption against discharge written into the second part of the test makes little sense: The entire statute creates a presumption against discharge unless the debtor can prove an undue hardship. Further, there is nothing in the text or history of §523(a)(8) that precludes a debtor from filing bankruptcy for the dominant or even sole purpose of discharging a student loan (if sufficient cause exists), and therefore this factor should not be given such great significance in any analysis. A primary problem with the Johnson test is that it is overly quantitative in its approach, relies predominantly on current financial data and does not allow the court much discretion or leeway to delve into qualitative matters that might be relevant,29 such as the debtor's past conduct, or even mental or physical problems that might have an impact on the debtor's ability to repay." Source:

Johnson Test Found to be: "Too Complicated"

As described above the Johnson test was fraught with problems for other courts to work with. The criteria laid out within Johnson resulted in requiring the court to seek several answers from the debtor's future circumstances.  As I read this, I was having a vision of a courtroom with a judge gazing into a crystal ball on top of his bench!  

Again from the ABI article: 

"In 1987, a different judge of the same court was called upon to interpret §523(a)(8) in In re Bryant.30 The Bryant court rejected the Johnson approach as too complicated. In its place, the Bryant court proposed the following:While the Bryant approach is, admittedly, less complicated than the Johnson test, and its second part allows for some judicial flexibility in the decision-making process, its first prong does not allow for much, if any, examination into why the debtor's income was near or below the poverty line. As the Third Circuit noted in rejecting the foregoing test: "The Bryant test does not adequately account for the fact that one of the most common reasons student-loan debtors find themselves in bankruptcy court is that their "subjective value judgments" are often (but not always) indicative of a spendthrift philosophy, which a bankruptcy court should be competent to consider before discharging student loans."32

Both the Johnson and Bryant tests are no longer in use in the Third Circuit, where they were established. In 1995, the Third Circuit rejected the Johnson and Bryant analyses in favor of the Brunner approach, discussed below. However, both Johnson and Bryant contribute value considerations to the dialogue concerning how §523(a)(8) should be applied: They both factor the federal poverty guidelines into their analyses, a consideration not expressly set forth in the Brunner test or the totality-of-the-circumstances test, and Johnson's inquiry into whether the debtor's budget problems were the result of negligence or irresponsibility (or even intentional, for that matter) is also useful. Whatever interpretation of §523(a)(8) the court eventually adopts as the uniform federal standard, it seems obvious that whether the repayment of the student loan over an extended period of time would force the debtor under the poverty level, for reasons beyond his or her control, should be part of the analysis. It is unlikely that Congress intended to hold student loans perpetually over the heads of the unfortunately impoverished. Source: Ibid ABI


Perhaps one of the most talked about and referenced tests you will read about under the subject of Undue Hardship is the 1987 Brunner decision.  The Brunner case was one that went all the way to the U.S. Bankruptcy Appeals Court for a definition of Undue Hardship.

While Brunner was decided before Congress wrote the legislation we now know as 11 U.S.C. §523 (a)(8), it set the tone for the courts to establish a some-what standardized three-part test which remains today to be the controlling standard in at least 8 of the 12 Bankruptcy circuits.  

Marie Brunner was a one of those students who the media was making a big ta-do over. Brunner filed for bankruptcy less than a year after graduating with a master's degree.

Following in the footsteps of the Johnson and Bryant decisions, the court in Brunner established a 3-part test (some refer to it as a 3-prong test), with the following criteria:

 "To stop debtors from trying to prematurely cancel their debts, the case laid out a three-pronged test: Individuals must prove they made a good-faith effort to pay the loan by finding work and minimizing their expenses. Debtors must also show they could not maintain a minimal standard of living based on their income and expenses if they had to repay the debt.
But then, in arguably the most challenging prong, the court must consider whether that situation is likely to persist for a significant part of the repayment period — which essentially requires the judge to predict the debtor’s future, ensuring what some courts have described as a “certainty of hopelessness.” (emphasis mine) Source:
Take Note: The three prongs in Brunner must ALL be satisfied.  If you fail to meet any one of the three, you are denied a discharge. 

The Brunner Test Criteria the Court Uses:
(1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself or her dependents if forced to repay the loans,
(2) 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) the debtor has made good-faith efforts to repay the loans

Passing the Brunner Test has been and continues to be a very difficult test to deal with. Both lawyers and judges have battled to interpret and understand the complexity of those three prongs. When Brunner appealed her decision which denied her discharge, it went to the U.S. Appeals Court in New York which upheld the District Courts Decision to deny her discharge filed as a Pro Se Debtor.  Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) 

Today many courts continue to struggle with a test that is based on a 1987 ruling and is now nearly 30 years old.  Students have much different 'circumstances' these days and those must be considered in light of the size of the debt, the age and health of the debtor and many other factors. 

It must be noted here that while there are a total of 11 U.S. Bankruptcy Circuits, all but (2) of them have adopted the Brunner Test as the standard for determining Undue Hardship.


The other undue hardship test that remains to be discussed is what has been dubbed the "Totality of Circumstances Test" ; a test that remains in use in the 8th Circuit who expressly declined to 'adopt' the Brunner Test because the 8th Circuit felt Brunner was too restrictive. The eighth circuit's use of the TOC test in Andrews v. South Dakota was further reaffirmed by its use in Long v ECMC. Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704 (8th Cir. 1981). Long v. Educational Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (8th Cir. 2003).
"We are convinced that requiring our bankruptcy courts to adhere to the strict parameters of a particular test would diminish the inherent discretion contained in § 523(a)(8)(B). Therefore, we continue-as we first did in Andrews-to embrace a totality-of-the circumstances approach to the “undue hardship” inquiry. We believe that fairness and equity require each undue hardship case to be examined on the unique facts and circumstances that surround the particular bankruptcy."  Source:

The Totality of Circumstances also contains three (3) "prongs" which are looked at to determine undue hardship:
"In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. Simply put, if the debtors’ reasonable future financial resources will sufficiently cover 13 payment of the student loan debt-while still allowing for a minimal standard of living-then the debt should not be discharged." (emphasis mine) Ibid SBLI-INC

 The Totality of Circumstances Test Criteria the Eight Circuit Court Uses:
(1) the debtor’s past, present, and reasonably reliable future financial resources
(2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and
(3) any other relevant facts and circumstances surrounding each particular bankruptcy case.
As I stated above, there are 11 Circuits in the U.S. Bankruptcy Court, (actually there is a 12th which is the District Court of Appeals  for the U.S. bankruptcy Courts), within the 11 there are (9) who currently are using the Brunner Test, and as I stated above, the 8th Circuit has rejected Brunner in favor of the TOC Test.  The remaining Circuit, the 1st Circuit, has to-date, refused to adopt a test.  The First Circuit has in fact, used both the Totality of Circumstances and Brunner to decide undue hardship.

In the July 7th, 2015 Policy Directive, the Department of Education listed a chart of the Circuit Court's Application of 11 U.S.C. §523(a)(8) and list the First Circuit's testing model as "Unknown".  And they quoted the First Circuit's ruling: In re Nash, 446 F.3d 188,190 (1st Cir. 2006) (refusing to adopt definitively either the Brunner or the totality of circumstances test)

So There You Have It - The Testing Requirements!

I think I will stop here for now. As I have said before, looking into how to get out from under my ever-increasing student loan debt resulted in researching undue hardship. If you have a student loan that you find you will never be able to pay, you may want to learn what it takes to prove you are under undue hardship.

The requirements are out there, and while I have tried to help you understand them, I will reiterate this very important fact; even the courts are still debating and trying to deal with the interpretation and implementation of the provisions under Bankruptcy Code 11 U.S.C.A. (A=amended) §523(a)(8).  


In spite of the conundrum, I will give you a huge secret -  You can win (I did) if you meet the criteria and if you file an Adversary Proceeding as part of your Chapter 7 Bankruptcy.

Secret to Passing the Test?  Know what is contained in key cases that courts have ruled on, and read and know the context of July 7th, 2015 Department of Education Policy Letter in regards to the who and when someone can have their student loans discharged in bankruptcy.  

I used and followed the teacher's syllabus (DOE Directive), studied hard, did long days and nights of research, took good notes, drafted and completed a "Plan B Paper" (my AP Complaint) of 56 pages, with a word count of 1,7512 words!

Until next time....  Please feel free to comment, I welcome any and all comments, and be sure and follow me using the email tab.  Thanks again!  Richard Precht, author

Sunday, March 6, 2016



Last week I declared my victory of winning a full discharge of nearly $130,000.00 without a trial, and completely without a fight from the Department of Education - Let's see how!

There is a test to pass have you prepared for it?

Based on what I have researched there is a seemingly endless cache of cases regarding the application of U.S.C. 11 §523 (a)(8) and the proving of undue hardship. The subject has been a topic of debate since it became a part of the bankruptcy code. Prior to 1978 student loans were treated like any other debt, and fully dischargeable by filing bankruptcy

Now nearly 40 years later the topic remains one in which debtors, creditors, amicus curiae, and courts are still struggling with. In spite of attempts to provide some standards to define undue hardship, bankruptcy courts have been left to create “tests” which have only created more controversy.

The facts are that even the different Courts do not use the same criteria or tests. While there remains much misinformation regarding the bankruptcy of student loans, there is no truth to the fallacy that student loans cannot be discharged in bankruptcy.  I also learned that most lawyers are not very educated in the area of student loans.

My own research uncovered several hundred cases where the courts have found undue hardship and allowed debts to be discharged. In fact, I found hundreds of cases where undue hardship was proven and student loans were discharged either partially or fully in bankruptcy.  Frankly, my sense is the number of student loan discharges may actually run into the thousands since 1978. Many of these discharges were accomplished without the aid of an attorney by debtors who acted on their own behalf as Pro Se debtor/plaintiffs.  

In fact, I am seeing that there are a significant number of cases and opinions where judges and amicus curiae briefs are calling for re-evaluation of the undue hardship tests being used and re-visiting the original intent of the legislation.  This is mainly due to the fact that today’s cases have more involved than a young student finishing college with a degree, starting a lucrative career, and then quickly filing bankruptcy to rid themselves of student loan payments.  And as I explain below, the history of the undue hardship provision is perhaps one that requires a full review.

The Beginning... Excluding Educational Debts from Bankruptcy

"The Bankruptcy Act of 1898, the predecessor to the current Code, did not provide any exceptions to discharge for student loans. This is unremarkable insofar as public education in the United States had not yet evolved into a benefit available to the masses through public funding.
The Commission on the Bankruptcy Laws of the United States, created by Congress in 1970, recommended that federal law be amended to prohibit the discharge of certain educational loans during the first five years of repayment, unless the debtor could establish that this prohibition caused a hardship.
Congress enacted such a law in 1976.  When the Code was being crafted in the late 1970s, the Senate and House originally disagreed on whether to keep this five-year non-dischargeability period, with the Senate favoring a continuation of the practice and the House initially favoring its elimination.  When the Code was finally passed, the Senate's position prevailed, and Congress enacted §523(a)(8)
Since then, Congress has, at various times, amended §523(a)(8) to extend its immunity from discharge to different types of educational loans that were not originally covered by its terms.  In 1990, Congress afforded student loan creditors even greater protection from the bankruptcy discharge by extending the automatic non-dischargeability period for such loans to seven years. 
In 1997, the National Bankruptcy Review Commission, which was tasked by Congress to conduct a comprehensive analysis of problems with the Code, recommended that §523(a)(8) be eliminated.  Congress was not persuaded.
Instead, when it next amended the Code in 1998, it eliminated the seven-year limitation period, which made all students loans non-dischargeable, absent a court determination that requiring debtors to meet their student loan obligations would constitute an "undue hardship."  
Clearly, Congress has progressively made student loans more difficult to discharge, and not the other way around. Consequently, both the text and history of §523(a)(8) lead to the conclusion that a debtor should bear a high burden in proving that a student loan debt is dischargeable The question with which federal courts have struggled is how to interpret the phrase "undue hardship."
The primary reason for the confusion in the courts is Congress's failure to define the term. Neither the term "undue" nor the phrase "hardship" are defined in the Code.  Thus, the judiciary is obligated to provide meaning for them under applicable cannons of statutory construction. It is clear that the courts are obligated to interpret §523(a)(8) according to its plain meaning. 
Thus, analysis of the concepts of "undue hardship" should, logically, begin with an understanding of the noun "hardship," which is qualified by the adjective "undue."  Source for above: 
For more on the definitions of "undue" and "hardship", refer to my earlier post "I made my case on undue hardship..." 2/28/2016)

Why was the law changed?

Prior to 1978 student loans were treated like any other debt and could be directly included in a chapter 7 or 13 bankruptcy.  The history of student loans can be traced back to the days of the "space race" and the Russian spacecraft the "Sputnik" the first vehicle to successfully orbit the earth in 1957.  In an attempt to catch up, the President and Congress urged young school students to enter college and become scientists and engineers and other highly educated professionals.

To help this movement congress enacted the National Defense Education Act (NDEA). Part of the package included the provision for financing education through the creation of th Carl D. Perkinse National Defense Student Loan (NDSL) program.  Viola!  The student loan crisis was about to enter "warp speed"!

NDSL loans later inherited the name "Perkins Loans" named after Congressman Carl D. Perkins from Kentucky's 7th District who was an advocate of education for the under-privileged. In 1965 education loans got additional support from the government through the enactment of the Higher Education Act and the Guaranteed Student Loan Program (GSLP) which later took on the name Stafford Loans, again named for a proponent of higher education, Senator Robert Stafford, Republican from Vermont.

Stafford Loans were primarily funds from private lending agencies which had the backing or guarantee of the Federal Government.  Stafford loans were created to assist students who demonstrated financial needs that could not be met by family or other sources.  Repayment requirements for those who took out Stafford loans included forbearances and deferments to allow students to get on their feet and have gainful employment for paying back the loans.

While the 1965 Higher Education Act gave the poorest student a chance at an education by way of GSLP and the Stafford program, the American Middle Class were finding it difficult to afford a college education.  Thus in 1978 Congress passed another education act called the Middle Income Student Assistance Act, which virtually made federal loans available to all students regardless of need.

Concurrent with the increase in availability of government backed loan monies, the costs of education also increased.  Between 1965 and 1975 college costs increased by 75%. Student borrowing was reported to increase close to $2 billion between 1975 and 1979. 

As far as bankruptcies reported on student loans, there were only 760 nationwide between 1968-1970. However by 1976 that number had climbed to over 8,600, with nearly $33.1 million dollars discharged as unpaid loans.

This seemingly large rise in defaulted and insolvent loans alarmed many in the congress and the media, and resulted in the news groups creating a mild hysteria.  Stories of students taking out huge loans to earn college degrees, then a few days after graduating filing for a bankruptcy to dump the debt, reached the ears of the public who in turn demanded some in congress to investigate. 

While there were a few high profile cases where graduates took advantage of bankruptcy, the fact is that those few were the exception and not the rule.  Yet, the mere idea that this could lead to a landslide of student loans being discharged in bankruptcy, led congress to change the bankruptcy code in 1976.  Congress modified the Higher Education Act of 1965, and the college student was now being observed as a liability and not so much as an asset.

What congress meant to say.... and how they tried to say it

While history has shown that very few students actually abused the former Bankruptcy Code, the changes in 1976 setup a prohibition within 20 U.S.C.A. §§1097-3 with §439A which to put it into simple terms prevented a student loan from being discharged within the 1st five years of repayment "unless" such debt was an undue hardship!  (I paraphrased).

Most thought the use of a waiting period after graduation would ease the default issue and prevent the rush to file bankruptcy.  For this time period that may have been a reasonable assumption, based on the facts at hand. However that barrier soon fell short and needed a higher bar.

In 1978, §439A was repealed and replaced with similar language as part of a Bankruptcy Reform Act.  Thus 11 U.S.C. §523(a)(8) was born.  Student loans were not dischargeable in bankruptcy within the 1st five years, (thus an exception to norm where any unsecured debt could be readily discharged), with the Act retaining the "unless" provision of undue hardship.

The Bankruptcy code in relation to student loans was modified again in 1990. The 5-year waiting period was found to be deficient in length and was changed to 7-years.  In addition that rule applied to both Chapter 7 and 13 bankruptcies.

In 1998, the waiting period was removed completely.  In Chapter 7 and 13 all educational loans are excepted (meaning not allowed) from being discharged in bankruptcy. The only provision allowed to override that exception is "unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependants". 

Congress and the Bankruptcy committee wrote this provision and it became what we now know as 11 U.S.C.A. §523(a)(8), the undue hardship clause.  And as has been stated here previously, Congress did not take the time to define the term undue hardship for the courts.

OK.... I think I will stop here for this week.  I wanted to get into the tests that have been used by the courts to prove the existence of undue hardship, however let's pick that up next time? Perhaps I will title that posting:  "Early Tests to Prove (justify) Undue Hardship" ?

Meanwhile, thanks for reading.  Please feel free to comment, and sign up for email notifications!  I think you will find this blog helpful if you are struggling with a student loan.

Thanks!  Richard Precht