Student Loan Dischargeability Recent Cases under 523(a)(8) Set High Bar for Debtors

Student Loan Dischargeability Recent Cases under 523(a)(8) Set High Bar for Debtors

Journal Issue: 
Column Name: 
Journal Article: 
Congress decided that student loans are beneficial, and that the federal taxpayers' money should be used to guarantee their repayment. Congress even set up various programs over the years to allow students to obtain loans directly from the U.S. Department of Education, the current program being the William D. Ford Federal Direct Loan Program (Direct Loans).3 As a result, student loans are very easy to obtain.

However, while student loans are easy to get, they are very difficult to discharge through bankruptcy. Congress made student loans one of those few types of obligations that are not discharged by way of the general bankruptcy discharge. Bankruptcy Code §523(a)(8) provides that student loans can only be discharged if excepting them from discharge would impose an "undue hardship" on the debtor and the debtor's dependents. Moreover, with the passage of BAPCPA, Congress broadened the category of student loans that are not subject to the general discharge to include virtually every imaginable student loan.4

Since Congress did not define "undue hardship," the courts have had to figure out what constitutes this level of hardship. The test adopted by the vast majority of the circuit courts (the only exceptions being the First and the Eighth) is the test that was first set out in the Second Circuit case Brunner v. New York State Higher Education Services Corp.5 The so-called Brunner test requires that the debtor prove by a preponderance of the evidence all of the following:

1. that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the 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.6

In reviewing the recent circuit-level cases, a pattern emerges: Many of the debtors stumble when it comes to the second and third prongs of the Brunner test. The "additional circumstances" and "good-faith efforts to repay" prongs are hurdles that debtors are often not able to negotiate, even though they may be able to prove that they cannot maintain a "minimal" standard of living for themselves and their dependents if forced to repay their loans. The following very brief case summaries are not meant to be a comprehensive review of recent student loan cases, but they do illustrate the typical problems faced by §523(a)(8) plaintiffs.7

Sixth Circuit: Olyer

The 2005 Sixth Circuit case formally adopting the Brunner test was Olyer v. Educational Credit Management Corp. (In re Olyer).8 Both the bankruptcy court and the Bankruptcy Appellate Panel (BAP) had held that the plaintiff qualified for discharge of his student loans, but the Sixth Circuit Court of Appeals disagreed and reversed.

The plaintiff's financial situation appeared to be sympathetic: He was 48 years old, married and had three children. He was pastor of a small church he had started, and his family's income had been less than $10,000 for the two preceding years. The family did not have health insurance, and the plaintiff suffered from a medical condition that had already caused his retinas to detach on multiple occasions. However, the plaintiff held both bachelor's and master's degrees, and prior to starting his church, he had worked as a salesman and an audio engineer, and he had owned his own business.

Applying the Brunner test, the court found that the plaintiff had not proved that there were "additional circumstances" (as required by prong two) indicating that the plaintiff's financial situation was going to continue over a significant portion of the repayment period of his student loans. "Olyer's choice to work as a pastor of a small start-up church cannot excuse his failure to supplement his income so that he can meet knowingly and voluntarily incurred financial obligations. By education and experience, he qualifies for higher-paying work and is obliged to seek work that would allow debt repayment before he can claim undue hardship."9

The Olyer court's "undue hardship" analysis was strictly in relation to prong two of the Brunner test. Failure to satisfy prong two was enough to fail the test.

Tenth Circuit: Alderete

In Alderete v. Educational Credit Management Corp.,10 the Tenth Circuit Court of Appeals agreed with the bankruptcy court that the debtors had failed to satisfy not only the second prong of the Brunner test, but also the third prong.11

The plaintiffs in Alderete both held associate's degrees in visual communications. They were young, healthy and had three children. The plaintiffs had not really tried to find better-paying jobs or additional employment (the husband worked in landscape maintenance, and the wife worked as a kindergarten assistant during the school year). The bankruptcy court concluded that it could not find that the plaintiffs' present circumstances somehow affected their prospects for earning more money in the future, and the Tenth Circuit agreed.

In addition, the bankruptcy court found that the plaintiffs failed to satisfy prong three's "good-faith effort to repay" requirement. The plaintiffs had only made minimal payments on their loans, their student loan debt was 98 percent of their total unsecured debt, and they had failed to consider applying for the Income Contingent Repayment Plan (ICRP) offered by Direct Loans.12 The Tenth Circuit agreed that the plaintiffs had also not satisfied prong three. Consequently, the plaintiffs' student loans were not discharged.

Sixth Circuit: Tirch

The Sixth Circuit case Tirch v. Pennsylvania Higher Education Assistance Agency (In re Tirch),13 was one that the plaintiff won at both the bankruptcy court and BAP levels, but lost at the circuit level. Once again, the plaintiff had problems with the second and third prongs of the Brunner test.

The plaintiff, who was single and more than 40 years old, held both bachelor's and master's degrees in counseling. She had been employed as a counselor in various positions making in the range of $27,000 - $28,000 per year. The plaintiff claimed to have various long-term medical and emotional problems that prevented her from working (however, she was working when she filed the adversary proceeding and she testified that her biggest medical problem was having lost her sense of taste).

The Sixth Circuit Court of Appeals did not find anything in the record indicating that the plaintiff's situation would persist for an appreciable period. In fact, the plaintiff had testified that she might be able to return to work in six months to two years. "Indeed, we are hard-pressed to discern, either from any of these statements or from the entire record, how her condition prevents her from working now, let alone in the future."14

As to prong three of the Brunner test, the court found that the plaintiff also failed to show that she had made "good-faith efforts to repay" the loans. The plaintiff had not availed herself of the ICRP, a fact that was found to be probative of her intent to repay her loans. In addition, the plaintiff had only paid a meager amount ($4,093.52, $1,850.77 of which was actually paid by her alma mater) on loans totaling $84,604.65. Consequently, the Sixth Circuit found that "undue hardship" had not been proven, and it reversed the BAP's decision affirming the bankruptcy court's judgment.

Fourth Circuit: Frushour

In the case where the Fourth Circuit Court of Appeals officially adopted the Brunner test with regard to chapter 7 cases (it had already adopted the test as to chapter 13 cases15), the plaintiff also could not satisfy prongs two and three of the Brunner test. In Educational Credit Management Corp. v. Frushour (In re Frushour),16 a case that the plaintiff had won at the bankruptcy and district court levels, the Fourth Circuit reversed.17

In Frushour, the plaintiff had an associate's degree in tourism and a Florida real estate license. She was more than 40 years old at the time she filed the adversary proceeding. She had one child (age seven), for whom she received no support. Neither the plaintiff nor her son had any disabilities. At the time of the adversary proceeding, the plaintiff was working as a self-employed decorative painter. However, she had been employed at higher-paying jobs over the years (for example, as a restaurant manager of the Queen Mary in Long Beach, Calif.). There was no evidence that the plaintiff was seeking, or had sought, employment that would pay her more or additional money.

The Fourth Circuit found that the plaintiff did not satisfy prong two of the Brunner test because "given her college education, real estate license and restaurant management experience, we are not left with the likelihood that her present circumstances will extend for the rest of her repayment period or that she will not be able to pay off her loans at some future date."18 Having a low-paying job "does not in itself provide undue hardship, especially where the debtor is satisfied with the job, has not actively sought higher-paying employment, and has earned a larger income in previous jobs."19

In addition, the Fourth Circuit went on to find that the plaintiff failed to satisfy the "good-faith efforts to repay" prong of the Brunner test. The Fourth Circuit found that the plaintiff should have considered the ICRP. "Frushour's only reasons for refusing that option, however, were that it was not suited for her and she wanted a fresh start. It is hard to see why these reasons are not simply shorthand for her lack of interest in repaying her debt."20

Ninth Circuit: Nys

In a very recent case that resulted in a pending remand back to the bankruptcy court, the Ninth Circuit Court of Appeals agreed with the BAP that prong two of the Brunner test does not require that "additional circumstances" be "exceptional" in order to cause an "undue hardship." In Educational Credit Management Corp. v. Nys (In re Nys),21 an opinion issued on April 26, 2006, the Ninth Circuit found that the bankruptcy court erred in requiring the plaintiff to show "exceptional circumstances beyond the inability to pay in the present and a likely inability to pay in the future."22 However, quoting the BAP's own published opinion in Nys, the Ninth Circuit noted that the plaintiff does need to prove that her circumstances are "insurmountable barriers to the debtors' financial recovery and ability to pay."23

The Ninth Circuit did not express an opinion in Nys as to whether the plaintiff was entitled to a discharge of her student loans (at time of trial, she was 51 years old, was making $40,244 per year as a university drafting technician and owed approximately $85,000 on her student loans). On remand, the bankruptcy court will need to determine whether the plaintiff has satisfied prong two (albeit without the "exceptional circumstances" requirement) by showing an "inability to pay in the present and a likely inability to pay in the future."24 She will need to prove that her inability to pay the loans is not based on lifestyle choices she has made, and that she does not have a "reasonable opportunity" to improve her financial situation.25 Moreover, on remand, the bankruptcy court still will need to determine whether the plaintiff has made "good-faith efforts to repay" her student loans.

It will be interesting to see what happens in Nys on remand.26 Will the plaintiff have more luck proving "undue hardship" than did the plaintiffs in Olyer, Alderete, Tirch and Frushour?


If these few cases suggest anything, it is that the Brunner test can be a very difficult one for plaintiffs to satisfy. Even in cases where the plaintiffs' situations appear, at first blush, to be sympathetic, they often fail to satisfy the second and third prongs of the Brunner test.

"Undue hardship," under Bankruptcy Code §523(a)(8), is a term that speaks volumes to those of us who handle student loan dischargability cases, but it also has a colloquial meaning. Understandably, it is sometimes difficult for the uninitiated to come to grips with the meaning of "undue hardship" when it comes to student loan dischargeability.



1 The author would like to thank Arthur Kim, a Southwestern Law School May 2006 J.D. candidate, for his assistance on this article.

2 The views and opinions expressed herein are solely those of the author and should not be attributed to the U.S. Attorney's Office or the U.S. Department of Justice.

3 Information on the William D. Ford Federal Direct Loan Program can be found at

4 In addition to government-made, insured or guaranteed student loans, and student loans made by nonprofit institutions, "any other educational loan that is a qualified education loan, as defined in §221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual" is now excepted from discharge. 11 U.S.C. §523(a)(8)(B).

5 831 F.2d 395 (2nd Cir. 1987). Circuit-level decisions adopting the Brunner test: 3rd Cir.: Pennsylvania Higher Education Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 306 (3d Cir. 1995); 4th Cir.: Educational Credit Management Corp. v. Frushour (In re Frushour), 433 F.3d 393, 399 (4th Cir. 2005); 5th Cir.: U.S. Department of Education v. Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003); 6th Cir.: Olyer v. Educational Credit Management Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); 7th Cir.: In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993); 9th Cir.: United Student Aid Funds Inc. v. Pena (In re Pena), 155 F.3d 1108, 1112 (9th Cir. 1998); 10th Cir.: Educational Credit Management Corp. v. Polleys (In re Polleys), 356 F.3d 1302, 1309 (10th Cir. 2004); 11th Cir.: Hemar Insurance Corp. of America v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003). My sincere apologies to the First and Eighth Circuits, but this article will only discuss cases from those circuits that have adopted the Brunner test.

6 Brunner, 831 F.2nd at 396.

7 It is worth noting that the dischargeability of Health Education Assistance Loans (HEALs) is governed by 42 U.S.C. §292f(g), not §523(a)(8).

8 397 F.3d 382, 385 (6th Cir. 2005).

9 Id. at 386.

10 412 F.3d 1200 (10th Cir. 2005).

11 The Tenth Circuit reversed the bankruptcy court's decision to give the plaintiffs a partial discharge of the loans.

12 Information on the ICRP can be found at DirectLoan/index.html. It is a payment plan that takes income and family size into account.

13 409 F.3d 677 (6th Cir. 2005).

14 Tirch, 409 F.3d at 681.

15 Ekenasi v. Educational Resources Institute (In re Ekenasi), 325 F.3d 541, 546-49 (4th Cir. 2003).

16 433 F.3d 393 (4th Cir. 2005).

17 Senior Circuit Judge Hamilton concurred in part and dissented (strongly) in part.

18 Id. at 402.

19 Id. at 401.

20 Id. at 403.

21 2006 WL 1084349 (C.A. 9) (April 26, 2006).

22 Id. at *6.

23 Nys v. Educational Management Corp. (In re Nyes), 308 B.R. 436, 444 (BAP 9th Cir. 2004) (emphasis added).

24 Nys, 2006 WL 1084349 at *6.

25 Id. at *5.

26 I am informed that a petition for rehearing en banc will be filed, so it is possible that this case will not be back before the bankruptcy court. Stay tuned.

Bankruptcy Code: 
Journal Date: 
Thursday, June 1, 2006