Chaos in the Courts The Meaning of Undue Hardship in 11 U.S.C. 523(a)(8) and the Argument for Establishing a Uniform Federal Standard
Some aspects of federal bankruptcy law are not uniformly applied throughout the nation due to divergent interpretations of law rendered by different federal courts. One such non-uniform area is the law concerning the interpretation of §523(a)(8) of the Bankruptcy Code, which addresses the circumstances under which certain student loans can be discharged in bankruptcy. One author has identified at least six undue hardship tests,4 though it appears that two tests, the "Brunner test" and the "totality of the circumstances test," have emerged as the primary methods of judicial interpretation of §523(a)(8). This article provides an overview of the history and text of §528(a)(8), discusses the diverse judicial interpretations of the "undue hardship" tests set forth in §523(a)(8) (with an emphasis on the two distinct U.S. courts of appeals lines of cases), and argues that federal courts should adopt a modified version of the flexible totality-of-the-circumstances test as the uniform standard for assessing the propriety of granting a debtor a discharge of his or her student loan due to undue hardship.
History and Text
The Bankruptcy Act of 1898, the predecessor to the current Code, did not provide any exceptions to discharge for student loans. This is unremarkable insofar as public education in the United States had not yet evolved into a benefit available to the masses through public funding. The Commission on the Bankruptcy Laws of the United States, created by Congress in 1970, recommended that federal law be amended to prohibit the discharge of certain educational loans during the first five years of repayment, unless the debtor could establish that this prohibition caused a hardship.5 Congress enacted such a law in 1976.6 When the Code was being crafted in the late 1970s, the Senate and House originally disagreed on whether to keep this five-year non-dischargeability period, with the Senate favoring a continuation of the practice and the House initially favoring its elimination.7 When the Code was finally passed, the Senate's position prevailed, and Congress enacted §523(a)(8).8 Since then, Congress has, at various times, amended §523(a)(8) to extend its immunity from discharge to different types of educational loans that were not originally covered by its terms.9 In 1990, Congress afforded student loan creditors even greater protection from the bankruptcy discharge by extending the automatic non-dischargeability period for such loans to seven years.10
In 1997, the National Bankruptcy Review Commission, which was tasked by Congress to conduct a comprehensive analysis of problems with the Code, recommended that §523(a)(8) be eliminated.11 Congress was not persuaded. Instead, when it next amended the Code in 1998, it eliminated the seven-year limitation period, which made all students loans non-dischargeable, absent a court determination that requiring debtors to meet their student loan obligations would constitute an "undue hardship."12 Clearly, Congress has progressively made student loans more difficult to discharge, and not the other way around. Consequently, both the text and history of §523(a)(8) lead to the conclusion that a debtor should bear a high burden in proving that a student loan debt is dischargeable.
In pertinent part, §528(a)(8) currently reads as follows:
(a) A discharge under §727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt—The question with which federal courts have struggled is how to interpret the phrase "undue hardship."(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non-profit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.13
The primary reason for the confusion in the courts is Congress's failure to define the term. Neither the term "undue" nor the phrase "hardship" are defined in the Code.14 Thus, the judiciary is obligated to provide meaning for them under applicable cannons of statutory construction. It is clear that the courts are obligated to interpret §523(a)(8) according to its plain meaning.15 Thus, analysis of the concepts of "undue hardship" should, logically, begin with an understanding of the noun "hardship," which is qualified by the adjective "undue."
The term "hardship" is defined in the Random House College Dictionary16 as "1. A condition that is difficult to endure; suffering; deprivation; oppression. 2. An instance or cause of this; something hard to bear.—Syn. 1. Affliction, trouble. Hardship, privation refer to a condition hard to endure. Hardship applies to a circumstance in which excessive and painful effort of some kind is required, as enduring acute discomfort from cold, battling over rough terrain, and the like." Webster's New American Dictionary17 defines the same term to mean "1. Suffering, privation. 2. Something that causes suffering or privation." Finally, Webster's New World Dictionary18 defines "hardship" as "1. Hard circumstances of life. 2. A thing hard to bear; specific cause of discomfort or suffering, as poverty, pain, etc.—Syn. See difficult." If a guiding principle can be culled from the foregoing definitions, it would seem to be that a hardship equates to "difficult-to-endure circumstances of life."
The same three sources were used to attempt to formulate a working definition of the concept of "undue hardship" by focusing on the word "undue." The definition of "undue" is more succinct: The Random House College Dictionary states that "undue" means "1. Unwarranted; excessive. 2. Inappropriate, unjustifiable; improper. 3. Not owed or currently payable." The definition in Webster's New American Dictionary is similar: "1. Not due; 2. Exceeding or violating propriety or fitness: excessive." Webster's New World Dictionary explains that the term means "1. Not yet due or payable, as a debt. 2. Not appropriate or suitable; improper. 3. Excessive, unreasonable; immoderate." These foregoing sources can be interpreted to agree that "undue" means inappropriate, unreasonable and unjustifiable.
When the meanings of the words "hardship" and "undue" are considered together, a fair reading of the phrase would be that a student loan is not dischargeable unless a debtor can prove that requiring him or her to repay the loan would impose upon them an inappropriate, unreasonable and unjustifiable set of circumstances that are difficult to endure. This definition would require the court to look not only at the debtor's circumstances (a quantitative component), but would also obligate the judiciary to delve into the reasons and justifications for such past, present and future circumstances (requiring a qualitative analysis). Such a standard would be faithful to the meaning of the text.
Several axioms have developed concerning the notion of "undue hardship." The concept of undue hardship has come to be associated with total incapacity both at the time of filing and on into the future to pay one's debts.19 To establish undue hardship, the court must be satisfied that repayment of the student loan is "hopeless,"20 though some courts have held that something just short of hopelessness can nevertheless constitute an "undue hardship."21 Mere "garden variety" hardship will not suffice.22 Present inability to repay a loan may not, in and of itself, suffice as a hardship.23 "Undue hardship requires the debtor to show that he or she is suffering from truly severe, even uniquely difficult circumstances, not merely severe financial difficulty."24 Ultimately, the court must make its decision "in light of the strong legislative policy against allowing the discharge of student loans in bankruptcy."25
The Johnson/Bryant Tests
The U.S. Bankruptcy Court for the Eastern District of Pennsylvania was one of the first courts to attempt to define the concept of "undue hardship" in §523(a)(8) in In re Johnson.26 The Johnson test divided its inquiry into three distinct components: a "mechanical" test, a "good-faith" test and a "policy" test.27
1. Mechanical Test. The court must ask: Will the debtor's future financial resources for the longest foreseeable period of time allow for repayment of the loan and be sufficient to support the debtor and his dependents at a subsistence or poverty level standard of living, as well as to fund repayment of the student loan? If the question is answered affirmatively, discharge of the loan must be denied. If answered negatively, then the court must apply the good-faith test.
2. Good-faith Test. Here, the court asks two questions:
(a) Was the debtor negligent or irresponsible in his efforts to minimize expenses, maximize resources or secure employment?If the answer to the first part of the good-faith test is no, then the debtor should be discharged of the obligation to repay his student loan. However, if the answers to both parts of the good-faith test are "yes," then a presumption against discharge is established—which may be rebutted by a negative answer to the third and final test.
(b) If "yes," then would lack of such negligence or irresponsibility have altered the answer to the mechanical test?
3. Policy Test. The court must ask: Do the circumstances—i.e., the amount and percentage of total indebtedness of the student loan and the employment prospects of the petitioner—indicate:
(a) that the dominant purpose of the bankruptcy petition was to discharge the student debt? orIf the answer to both parts of this question is a firm "no," then the debtor should be discharged from his student loan obligation. If the court answers "yes" to either part of the question, then the discharge should be denied.28
(b) that the debtor has definitely benefitted financially from the education that the loan helped to finance?
As the foregoing quotation illustrates, the Johnson test is rather complex. Nevertheless, it contains several aspects worth retaining. For example, it requires the court to look at whether the debtor's foreseeable income would allow for reasonable support and payment of the loan, and it requires the court to examine the reason for the debtor's alleged hardship (i.e., whether the debtor engaged in negligent or irresponsible fiscal decision-making). The presumption against discharge written into the second part of the test makes little sense: The entire statute creates a presumption against discharge unless the debtor can prove an undue hardship. Further, there is nothing in the text or history of §523(a)(8) that precludes a debtor from filing bankruptcy for the dominant or even sole purpose of discharging a student loan (if sufficient cause exists), and therefore this factor should not be given such great significance in any analysis. A primary problem with the Johnson test is that it is overly quantitative in its approach, relies predominantly on current financial data and does not allow the court much discretion or leeway to delve into qualitative matters that might be relevant,29 such as the debtor's past conduct, or even mental or physical problems that might have an impact on the debtor's ability to repay.
In 1987, a different judge of the same court was called upon to interpret §523(a)(8) in In re Bryant.30 The Bryant court rejected the Johnson approach as too complicated. In its place, the Bryant court proposed the following:
[F]or the purposes of §523(a)(8), "undue hardship" exists [...]While the Bryant approach is, admittedly, less complicated than the Johnson test, and its second part allows for some judicial flexibility in the decision-making process, its first prong does not allow for much, if any, examination into why the debtor's income was near or below the poverty line. As the Third Circuit noted in rejecting the foregoing test: "The Bryant test does not adequately account for the fact that one of the most common reasons student-loan debtors find themselves in bankruptcy court is that their "subjective value judgments" are often (but not always) indicative of a spendthrift philosophy, which a bankruptcy court should be competent to consider before discharging student loans."32(1) where the debtor has net income which is not substantially greater than federal poverty guidelines, because a debtor so living perforce is unable to maintain a minimal standard of living and make payments on student loans; or
(2) where the debtor has income substantially above the aforesaid poverty guidelines, but there is a presence of "unique" or "extraordinary" circumstances which render it unlikely that the debtor will be able to repay his or her student loan obligations.31
Both the Johnson and Bryant tests are no longer in use in the Third Circuit, where they were established. In 1995, the Third Circuit rejected the Johnson and Bryant analyses in favor of the Brunner approach, discussed below. However, both Johnson and Bryant contribute value considerations to the dialogue concerning how §523(a)(8) should be applied: They both factor the federal poverty guidelines into their analyses, a consideration not expressly set forth in the Brunner test or the totality-of-the-circumstances test, and Johnson's inquiry into whether the debtor's budget problems were the result of negligence or irresponsibility (or even intentional, for that matter) is also useful. Whatever interpretation of §523(a)(8) the court eventually adopts as the uniform federal standard, it seems obvious that whether the repayment of the student loan over an extended period of time would force the debtor under the poverty level, for reasons beyond his or her control, should be part of the analysis. It is unlikely that Congress intended to hold student loans perpetually over the heads of the unfortunately impoverished.
The Brunner Test
The first U.S. appeals court to discuss the meaning of the term "undue hardship" in §523 was the Second Circuit in In re Brunner in 1987.33 Though Brunner was decided before the 1998 amendments to §523(a)(8), it has been applied post-amendment as well.
Under the Brunner test, a student loan can be discharged if the debtor can establish that:
(1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself or her dependents if forced to repay the loans,The Brunner test has been adopted as the controlling standard in at least seven other circuits,35 and is the clear majority view.
(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.34
The Brunner test is not, however, without its own shortcomings. To begin with, it provides no objective standard to determine what constitutes a "minimal" standard of living. Use of federal poverty standards, as suggested in Johnson and Bryant, might provide a useful floor. A person who has a household income below the poverty level through no fault of his or her own, and who can show that his or her income is likely to stay so low for the time period the loan is in repayment status, would seem to have established a prima facie case of undue hardship. Further, the primary problem with the Brunner test is that it does not expressly provide for any examination into why the debtor is in his or her current financial predicament, which might properly be characterized as faulty or liability inquiry. After all, Congress obviously intended to limit the discharge of student loans to those persons who, for reasons beyond their control, would suffer an undue hardship by repaying the loans. A person suffering a current financial hardship due to events within his or her control should not be able to obtain a discharge.
In the Eighth Circuit, a totality-of-the-circumstances test is used to determine whether it would be an "undue hardship" on a debtor to require her to repay the student debt she owes.36 This test requires the bankruptcy court to examine the totality of the circumstances, "with special attention to" (1) the debtor's current and future "reasonably reliable financial resources," (2) the debtor's and his or her dependents' reasonable, necessary living expenses, and (3) "any other circumstances unique to the particular bankruptcy case."37 Regarding the first and second factors, the debtor should demonstrate that he or she has "done everything possible to minimize expenses and maximize income," and the possibility of changes in the future should also be presented.38
Many courts assessing the question of undue hardship under the totality-of-the-circumstances approach have resorted to a list of factors as a guide. Factors to be examined include the following:
- total incapacity now and in the future to pay one's debts for reasons not within the control of the debtor
- whether the debtor has made a good-faith effort to negotiate a deferment or forbearance of payment
- whether the hardship will be long-term
- whether the debtor has made payments on the student loan
- whether there is permanent or long-term disability of the debtor
- the ability of the debtor to obtain gainful employment in the area of study
- whether the debtor has made a good-faith effort to maximize income and minimize expenses
- whether the dominant purpose of the bankruptcy petition was to discharge the student loans
- the ratio of the student loan to the total indebtedness.39
Both the Brunner test and the totality-of-the-circumstances test have merit. However, the Brunner test does not provide for any inquiry into the reasons for the debtor's claimed past or current hardship (though it does provide for consideration of whether the hardship will extend into the future). Any inquiry into "undue hardship" must not only involve a determination as to whether a hardship exists, but must, as a matter of textual plain meaning, examine whether the hardship is undue (inappropriate, unreasonable and unjustified).
The Eighth Circuit's totality-of-the-circumstances test affords the bankruptcy courts the discretion needed to examine each case on its merits by looking at the debtor's past, present and likely future financial condition, as well as the reasons for the debtor's finances, and by assessing the impact that repayment would have on the ability of the debtor to provide a fair standard of living. The nine factors developed by lower courts within the Eighth Circuit, combined with some aspects of Johnson and Bryant, namely consideration of the poverty level as a baseline and the degree of the debtor's culpability for his or her financial problems, are useful and should be the law of the land.
The question of whether a student loan is discharged should be based on the unique facts of each case and not on the jurisdiction in which the case was filed. While both the Brunner and the totality-of-the-circumstances tests have advantages, the text and history of §528(a)(8) supports the conclusion that use of the more expansive totality-of-the-circumstances approach best fulfills the mandate established by Congress that student loans should only be discharged if, when all of the debtor's unique circumstances are taken into consideration, requiring him or her to repay the loan would impose an undue, and not a routine, hardship.
1 Assistant U.S. Attorney, Southern District of Iowa; J.D. (1989) Washington University; M.A. (1986 - Sociology) and B.A. (1984 - Journalism) Eastern Illinois University; former law clerk (1989-91) to the late Hon. Frank W. Koger, U.S. Bankruptcy Judge, W.D. Mo. The views expressed in this article are solely those of the author and should not be attributed to the U.S. Department of Justice, the U.S. Attorney for the Southern District of Iowa or any other person or entity associated with him. The author thanks Inga Bumbary-Langston for her contributions to this article, and for her support. Return to article
2 Railway Labor Executives' Ass'n. v. Gibbons, 455 U.S. 457, 471 (1982) ("Although the debate in the Constitutional Convention regarding the bankruptcy clause was meager, we think it lends some support to our conclusion that the uniformity requirement of the clause prohibits Congress from enacting bankruptcy laws that specifically apply to the affairs of only one named debtor."). Return to article
3 Id. at 473 ("The uniformity requirement, however, prohibits Congress from enacting a bankruptcy law that, by definition, applies only to one regional debtor."); Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 172 (1946) ("The Constitutional requirement of uniformity is a requirement of geographic uniformity. It is wholly satisfied when existing obligations of a debtor are treated alike by the bankruptcy administration throughout the country regardless of the state in which the bankruptcy court sits."); but, see Blanchette v. Connecticut General Ins. Corps., 419 U.S. 102, 158 ("The uniformity provision does not deny Congress power to take into account differences that exist between different parts of the country and to fashion legislation to resolve geographically isolated problems. 'The problem dealt with (under the bankruptcy clause) may present significant variations in different parts of the country.'"). Return to article
4 See Pashman, "Discharge of Student Loan Debt Under 11 U.S.C. §523(a)(8): Reassessing 'Undue Hardship' after the Elimination of the Seven-year Exception," 44 N.Y.L. Sch. L. Rev. 605, 608 - 619 (2001). Return to article
15 Lamie v. U.S. Trustee, ___ U.S. ___, 124 S.Ct. 1023, 1030 (2004) ("The starting point in discerning congressional intent is the existing statutory text and not the predecessor statutes. It is well established that 'when the statute's language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.'" (citations omitted). Return to article
35 Brightful v. Penn. Ed. Assist. Agency, 267 F.3d 324 (3rd Cir. 2001); Ekanasi v. The Ed. Resources Inst., 325 F.3d 541 (4th Cir. 2003); In re Gerhardt, 348 F.3d 89 (5th Cir. 2003); Goulet v. Ed. Credit Manag. Corp., 284 F.3d 773 (7th Cir. 2002); In re Rifino, 245 F.3d 1083 (9th Cir. 2001); Ed. Credit Manag. Corp. v. Polleys, 350 F.3d 1302 (10th Cir. 2004); In re Cox, 338 F.3d 1238 (11th Cir. 2003). Return to article
39 In re Morris, 277 B.R. 910, 914 (Bankr. W.D. Ark. 2002); In re Fahrer, ___ B.R. ___, 2004 WL 557292 (Bankr. W.D. Mo. 2004); In re Morgan, 247 B.R. 776, 782 (Bankr. E.D. Ark. 2000) (citations omitted). Return to article