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A Brief History of Student Loan Discharge in Bankruptcy

bluefieldphotos bp [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrUnder the federal Bankruptcy Code, certain debts are not eligible for discharge by a bankruptcy court at the end of a case. Nondischargeable debts include certain tax debts, 11 U.S.C. § 523(a)(1); spousal and child support, id. at § 523(a)(5); and debts that resulted from fraud, theft, and other deceptive or unlawful acts, id. at §§ 523(a)(2), (4), (6). For many, perhaps most nondischargeable debts, a rationale based on public policy seems clear. This might not be the case, however, with regard to student loans, including both public loans, which are backed by the federal government, and private loans. Rather than attempting to deduce a public benefit from making student loans nondischargeable, it is worth looking into how they became nondischargeable in the first place.

Student loans are only subject to discharge in bankruptcy if a debtor proves that continuing to make payments would cause an “undue hardship” to them and their dependents. 11 U.S.C. § 523(a)(8). No single legal standard applies throughout the country for determining whether a debtor has established “undue hardship.” The Ninth Circuit, which includes California, has adopted a three-part test known as the Brunner test, found in Brunner v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987). Other circuits have adopted a test known as the “totality of the circumstances,” first developed in In re Andrews, 661 F.2d 702, 704. (8th Cir. 1981). Both tests require a court to examine a debtor’s financial situation and determine whether it is possible that conditions might improve enough to allow the debtor to continue paying the loans. In other words, bankruptcy courts must attempt to predict the future.

Student loans therefore differ in at least one important way from other nondischargeable debts because there is an exception provided in the statute itself. As noted earlier, most nondischargeable debts have some obvious justification, such as the fault of the debtor in the case of a debt incurred through fraud, or the need of a dependent in the case of child support. Student loans, as it turns out, became nondischargeable quite incrementally.

Prior to the 1970s, student loan debt was generally dischargeable in bankruptcy. Congress has gradually chipped away at student loan dischargeability since then. In 1976, it added a provision requiring proof of “undue hardship” for student loans that were less than five years old. Pub. L. 94-482 § 127. It expanded this waiting period to seven years in 1990, Pub. L. 101-647 § 3621, and eliminated it altogether in 1998, Pub. L. 105-244 § 971. In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress added private student loans, which have no backing from the federal government, to the list of loans that are not subject to discharge. Pub. L. 109-8 § 220.

For the past 20 years, Los Angeles bankruptcy lawyer Devin Sawdayi has represented individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. We help our clients rebuild their finances and get a fresh start with dignity and respect. Contact us today online or at (310) 475-939 to schedule a free and confidential consultation to see how we can help you.

More Blog Posts:

Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015

Ninth Circuit Bankruptcy Appellate Panel Considers “Good Faith” Requirement for Discharge of Student Loans, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2014

Bankruptcy Court Grants Discharge of Student Loans, Finding that Debtor’s Mental Illness Constitutes “Undue Hardship”, Los Angeles Bankruptcy Lawyer Blawg, March 24, 2014

Photo credit: bluefieldphotos bp [CC BY-SA 2.0], via Flickr.