Student Loan Bankruptcy Problem A Doozy

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“Her entitlement to a discharge in bankruptcy is unquestioned.” She is “destitute” according to Chief Judge Frank H. Easterbrook of the 7th Circuit Court of Appeals in a recent opinion. These are the opening statements that begin a sad story. Despite her extreme circumstances, a 53 year old woman who had not been able to find a job in 20 years was forced to struggle through multiple courts in order to discharge her student loan debt in that bankruptcy case. The opinion of the court, decided April 10, 2013, winds around the law but ultimately comes to a correct conclusion.

Judge Easterbrook is sympathetic and clearly moved by the debtor’s unfortunate circumstances. He must at least consider the court‘s earlier decision, In re Roberson, 999 F.2d 1132 (7th Cir. 1993), adopting the Brunner Test for student loan dischargeability. Despite the unfavorable precedent, common sense prevails. Judge Easterbrook tells us that “The statutory language is that a discharge is possible when payment would cause an “undue hardship”. It is important not to allow judicial glosses, such as the language in Roberson and Brunner, to supersede the statute itself.”

Bankruptcy discharge of student loans is more difficult and granted by bankruptcy courts less frequently than it should be. Congress provided, in §523(a)(8) of the bankruptcy code, that student loans are dischargeable in bankruptcy cases when requiring payment would impose undue hardship on the debtor or the debtor’s dependants. It doesn’t sound too terribly difficult. The plain language of the statute focuses on what happens to the debtor or the debtor’s dependants. It requires the debtor do nothing but suffer undue hardship in order to qualify for discharge.

What is undue hardship and what does it mean? According to the American Heritage Dictionary of the English Language, third edition, the word “undue” refers to something that exceeds what is appropriate or normal. That same source defines hardship as suffering or privation. A hardship is something that is difficult to endure. Putting these together, an undue hardship would be something that is not normal and is difficult to endure.

The Brunner Test calls for more than suffering from a bankruptcy debtor seeking discharge of a student loan. That commonly adopted set of rules requires a debtor to prove:

“(1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans; (2) that 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) that the debtor has made good faith efforts to repay the loans.”

Congress did not require the debtor to make a good faith effort at payment to qualify for discharge. In fact, at one point the law allowed discharge without any suffering whatsoever if the debtor had been in repayment status for a specified period of years before the bankruptcy was filed. Congress could have simply combined to two requirements rather than eliminating the waiting period had it chosen to do so.

Congress never mandated that the suffering must continue into the indefinite future. The requirement that debtor’s “state of affairs” be unlikely to improve is nowhere to be found in the language of the statute written by Congress. It is just another judicial gloss that should not be allowed to supplant the clear statutory language of §523(a)(8).

Perhaps student loans should not be easy to discharge in bankruptcy. Congress set out a standard that requires suffering by the debtor that is out of the ordinary before the debtor’s circumstances warrant discharge. However, the move by some judges to challenge the discharge of student loans for a debtor who is destitute is just plain wrong. It matters not how many courts before it were wrong. Multiple wrongs, long perpetuated as precedent, can never be appropriate grounds for a good decision. This student loan discharge problem is a doozy and should be corrected.