LegiStorm

Summary:

As overall student loan indebtedness in the United States has increased over the years , many borrowers have found themselves unable to repay their student loans. Ordinarily, declaring bankruptcy is a means by which a debtor may “discharge” — that is , obtain relief from — debts he is unable to repay. However, Congress, based upon its determination that allowing debtors to freely disc harge student loans in bankruptcy c ould threaten the student loan program, has limited the circumstances in which a debtor may discharge a student loan. Under current law , a debtor may not discharge a student loan unless repaying the student loan would imp ose an “undue hardship” upon the debtor and his dependents. T he Bankruptcy Code does not define “undue hardship,” and the legislative history of Section 523 does not precisely specify how courts should determine whether a debtor qualifies for an undue hard ship discharge. The task of interpreting this statutory term has consequently fallen to the federal judiciary. Courts, however, have disagreed regarding exactly what a debtor must prove in order to discharge a student loan on undue hardship grounds . The va st majority of courts have interpreted “undue hardship” to require the debtor to prove three things: (1) t he debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay the loans; (2) a dditional circumstances exist indicating that the debtor’s inability to pay is likely to persist for a significant portion of the repayment period of the student loans; and (3) t he debtor has made good faith efforts to repay the loans. The debt or must prove each of these elements by a preponderance of the evidence. This standard is commonly called the “ Brunner ” test, after the case in which the standard originated. The Brunner test is highly fact - intensive, and not all courts apply the Brunner s tandard the same way. Indeed, each factor has resulted in various subsidiary splits in the courts with respect to a host of issues . Whereas the vast majority of courts apply the Brunner test to determine whether excepting a student loan from discharge woul d impose an undue hardship upon the debtor, two courts have explicitly declined to adopt the Brunner standard. Instead, these courts apply an alternative standard known as “the totality - of - the - circumstances test,” weighing numerous, nonexclusive factors wh en considering whether student loan debt should be discharged. In response to this split of authorit y , some Members of Congress and commentators have advanced numerous proposals to alter the way that student loans are treated in bankruptcy. T his report the refore provides a comprehensive overview of the various legal issues related to whether , and under what circumstances , a debtor may discharge a student loan in bankruptcy. The report begins by providing general background on bankruptcy law and the principles governing the discharge of outstanding debt. In so doing, the report explains how and why the Bankruptcy Code generally makes student loans nondischargeable absent an “undue hardship.” The report then describes the various legal standards that c ourts have applied when determining whether a particular debtor is entitled to an undue hardship discharge. The report closes by describing various potential considerations for Congress, including ways in which Congress could alter the Bankruptcy Code’s cu rrent treatment of student loans.