One Word in Bankruptcy Law That Could Lead to More Forgiven Student ...

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The instructions from Congress for how a struggling student loan borrower can attempt to leave that debt behind in bankruptcy contains one word that can have two meanings.

The resulting ambiguity caught the attention of Emory University law professor Rafael Pardo more than a decade ago, prompting him to push for bankruptcy judges to interpret the one word—“undue”—more softly.

Doing that would make it easier for bankrupt people to cancel big student loan bills. And it is what Congress intended, Prof. Pardo concluded after scouring federal law for other instances when lawmakers wrote the word.

Prof. Pardo revived his theory most recently in a closely watched case of an unemployed Massachusetts man, Robert Murphy, who successfully canceled more than $240,000 in student loan debt from putting three kids through college. His case settled before First U.S. Circuit Court of Appeals judges ruled, but his argument goes like this:

Student loan borrowers who want to get rid of those loans with their other debts need to convince a bankruptcy judge that repaying the student loans would cause them to face “undue hardship.” Judges can interpret “undue” to mean either “excessive” or “unjust.”

A judge who interprets “undue” to mean “unjust” is likely to explore how the borrower ended up with such a big student loan bill, then make a judgment call as to whether the borrower deserves the consequences that would come with full repayment. That kind of inquiry would incorporate “notion[s] of fairness and justice that are going to be personal to the judge deciding the case,” Prof. Pardo said. And it is a much tougher standard for the borrower to face.

But interpreting “undue” to mean “excessive” raises a much simpler question: How would the borrower be affected if told to fully repay the loans? Would that burden be too much?

“The more it becomes an economic calculus, it should be easier” for borrowers to prove, Prof. Pardo said. And so far, he said, judges have ruled using both interpretations of the word “undue.”

Even as student loan debt has ballooned to spark a national conversation about relief programs for struggling borrowers, the mechanism that bankrupt student loan borrowers can use to cancel that debt has largely escaped widespread notice because of attempts are so rare. Such cases lead to invasive scrutiny of a person’s deeply personal financial decisions and cost thousands of dollars just to initiate.

The successful attempt by Mr. Murphy earlier this year gave hope to consumer advocates who say the process should be easier.

Mr. Murphy got much-needed help in the dispute when he finally got lawyers to represent him. For most of it, he represented himself. Prof. Pardo found that student loan borrowers who don’t hire a lawyer when trying to get out of their student loans have only a 28.5% chance of litigation success—a far smaller chance than the 56.2% success rate for people who hired lawyers.

Mr. Murphy’s lawyer, Steven Pohl, pointed out that the willingness of Educational Credit Management Corp., a Minnesota agency hired by the government to defend the loans, to settle the dispute strays from the group’s usual playbook to fight for a win.

An Educational Credit Management lawyer declined to comment.

John Rao of the National Consumer Law Center, a Boston consumer advocacy group that says bankruptcy laws don’t provide enough student loan relief, said that Prof. Pardo’s theory has merit and could be a way for judges to make canceling student loans easier for bankrupt borrowers.

“A judge who wants to deviate slightly—this is one of several arguments that could be used to support that,” he said.

ECMC’s decision to settle with Mr. Murphy comes as many consumer groups and legal experts attack the tough test that almost all bankruptcy judges use to figure out whether a student loan borrower would face an “undue hardship.”

The National Consumer Law Center has complained in court papers that the test is too strict, saying it “has morphed into a morality test in which a myriad of the debtor’s life choices and past conduct are called into question.”

Others say it is outdated. The test traces to a 1987 court opinion, back when the cost of tuition and fees at a four-year school was $4,909 per year, according to government statistics. A federal judge wrote in an opinion in 2013 that the test “no longer reflects reality.”

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech