20 Oct

Student loan debt is a growing concern in the American public psyche.  About 68% of all students borrow money from either the federal government or private lenders to cover the costs of tuition, room and board.[1]  As of July 2013, the total outstanding student loan debt in the United States was $1.1 Trillion and growing.[2]  Student loan debt has grown nearly 300 percent in the last eight years.[3] The current default rate is 14%.[4]  Student loan debt will almost certainly continue to grow. As many bankruptcy attorneys will attest, we are seeing more and more potential clients with student loans. Unfortunately, our ability to help is limited.

The internet is full of stories of people drowning in their student loan debt. Just the other day, I read a story about how a California couple were having trouble paying their deceased daughter’s $200,000 student loans. Relief is possible, depending on the category into which the loan falls. Is the loan a federally backed loan or is it from a private lender. Was the loan for the cost of education, including tuition, room and board, and books? Or was the money used for non-educational purposes? A debtor with federal loans is more likely to have options while very little relief is available for private loans.

Student Loans and Bankruptcy

Since 2005, both federally backed student loans and private student loans are dischargeble only if a debtor proves it would be an “undue hardship” to repay the loan.  See  11 U.S.C. §523(a).  The attack begins with the debtor filing an adversary proceeding in their bankruptcy case, claiming they will suffer an “undue hardship” if forced to pay all or a portion of the student loan debt. Congress has not defined “undue hardship”, leaving the issue to the bankruptcy courts based on the facts of each case.

Undue Hardship

The courts have generally adopted the Brunner Test, a three-pronged test requiring the debtor to prove by a preponderance of the evidence that:

1. the debtor cannot maintain, based on current income and expenses, a “minimal standard of living… if forced to repay the loans;

2. 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. the debtor has made good faith efforts to repay the loans.

In re Brunner, 831 F.2d 395 (2nd Cir. 1987).

“The debtor has the burden to prove all three prongs of the Brunner test.  If the debtor fails to prove any one of the three prongs then the loan will not be discharged.” In re Carnduff, 367 B.R. 120, 127 (9th Cir. BAP 2007) citing In re Nys, 308 B.R. 436, 441-42 (9th Cir. BAP 2004, aff’d 446 F.3d 938 (9th Cir. 2006).

Minimal Standard of Living

The debtor must show that he cannot maintain a minimal standard of living based on current income versus current expenses. The court must make a factual determination that the debtor “has no present ability to maintain a minimal standard of living if forced to repay his loans”. In re Mason, 315 B.R. 554, 560 (9th Cir. BAP 2004). Courts have discretion to determine the reasonableness of the debtor’s expenses. In re Pena, 155 F.3d 1108 (9th Cir. 1998). This test is proved by the schedules the debtor files at the commencement of the bankruptcy case and is usually the reason the debtor files bankruptcy in the first place.

Additional Circumstances

The second prong requires the debtor to prove through additional circumstance that his hardship will persist and that the “circumstances [are] more compelling than that of an ordinary person in debt.” Nys, 308 B.R. at 444.   Examples of additional circumstances include, but are not limited to, serious mental or physical disability which prevents employment or advancement, a debtor’s obligation to care for dependents, limited number of work years remaining and age or other factors that prevent retraining or relocation. In re Lilly, Adv. Proc. No. 11-90470-CL, (Bankr. S.D.Cal. 2013).

Lilly was a 55 year old debtor with approximately $276,370 in student loan debt. Lilly was denied a discharge because the Judge perceived that Lilly could earn more income based on his several graduate degrees, including a juris doctor degree. Lilly had never worked as a lawyer and his work history did not support such a finding, but nevertheless the judge believed, rightly or wrongly, it could happen.

Good Faith

The third prong of the Brunner test, “good faith” requires the debtor to show that the debtor has made appropriate efforts to repay the loan by maximizing income and minimizing expenses and to negotiate an affordable repayment plan. In re Jorgensen, 479 B.R. 79, 89 n.4 (9th Cir. BAP 2012). The cases generally require a showing that that debtor has made a reasonable attempt to repay the debt. However, in a recent case, a judge granted a discharge concluding that the debtor met her burden of proof of “good-faith” even though she had never made a payment towards her $40,098 student loan debt. In re Roth, 490 B.R. 908 (9th Cir. BAP 2013).

Partial Discharge

As the student loan issue becomes more prevalent in the news and in court, the courts may be slowly shifting towards the consumer. While the courts may not be willing to fully discharge student loan debts just yet, they are allowing partial discharges with more frequency. The debtor still needs to prove “undue hardship” under Brunner but can now show that they cannot pay the entire debt over a reasonable period of time. A debtor who refuses to accept the lender’s settlement offers and repayment options may still be eligible for partial discharge.  See In re Hedlund, 718 F.3d 848 (9th Cir. CA 2013).

Federal Repayment Options Outside of Bankruptcy

Debtors with multiple federally backed loans can apply to consolidate their loans through the Department of Education’s Direct Consolidation Loan program. The Public Service Loan Forgiveness program gives a debtor a chance to have student loans forgiven if the student chooses a public service profession.  Other options include the Income Based Repayment Plan (IBR), the Pay as you Earn Repayment Plan, the Income Contingent Repayment Plan, and the Income Sensitive Repayment Plan. More information can be found at

Private Repayment Options

Debtors with private student loans are at the mercy of the private lender. A lender may agree to a forbearance, but the debt will continue to accrue interest and possibly add on fees and other charges. Generally though, debtors are forced to take their chances in court and must prove “undue hardship” for relief.


Our society places a premium on a higher education. Students are increasingly forced to borrow to pay for it. Students are graduating with substantial debt and faced with years of making payments. Congress has chosen to make student loan debt virtually impossible to discharge in bankruptcy. Perhaps Congress should reconsider its position before we all begin to suffer from the burdens of student loan debt.

[1] National Center of Education Statistics, Digest of Education Statistics,, U.S. Department of Education (2014).

[2] Student Loan Debt Statistics, (2014).

[3] Shocking Student Debt Statistics, (2014).

[4] Id., includes all loans with at least one past due payment.

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