Student loans present a uniquely difficult obstacle to debtors in bankruptcy. Federal law completely excepts student loans from discharge, unless a debtor can show “undue hardship” to themselves and their dependents. 11 U.S.C. § 523(a)(8). Most courts around the country use a three-prong test to determine if a debtor has established “undue hardship,” known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs., 831 F.2d 395 (2d Cir. 1987). The Ninth Circuit, which includes California, adopted the Brunner test in In re Pena, 155 F.3d 1108 (9th Cir. 1998). A California bankruptcy court recently considered a debtor’s claim of undue hardship in an order that includes an in-depth review of the Brunner test. In re Shells, No. 11-26042, Adv. No. 14-2111, mem. dec. (Bankr. E.D. Cal., May 7, 2015).
The debtor in Shells obtained student loans for her bachelor’s and master’s degrees. According to the court, she consolidated several private loans into a single U.S. Department of Education (DOE) loan in 2007, with a principal balance of over $96,000 at 7.375 percent. She has reportedly been employed full-time by the county since 1998, and she claimed a net monthly income of just under $6,000. Her husband is disabled, and the two of them have three children.
At the time of the court’s order in May 2015, the student loan balance had grown to more than $137,000. The court noted that the debtor had obtained an Income-Contingent Repayment (ICR) plan in late 2008, which reduced her monthly payment. She reportedly defaulted on the ICR plan twice. She filed for Chapter 7 bankruptcy in March 2011 and received a discharge, which did not include the student loans, that June. She received an Income-Based Repayment (IBR) plan in March 2013 but reportedly defaulted again. After reopening her Chapter 7 case in April 2014, the debtor filed an adversary proceeding against the DOE to discharge the student loan debt. The DOE moved for summary judgment.