By: Maria Casamassa
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Under the Bankruptcy Code, a discharge of student loan debt is not justified “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents . . . .”[1] A finding of undue hardship is difficult to establish; accordingly, student loan debt is rarely discharged.[2] However, in In re Fern,[3] the United States Bankruptcy Court for the Northern District of Iowa applied the totality of the circumstances test and held that the debtor presented sufficient evidence demonstrating that excepting her student loans from discharge would impose an undue hardship on her and her family and, therefore, the debt was dischargeable.[4]
The debtor in the case, Sara Fern, owed $27,000 in student loans that she borrowed for two separate educational programs.[5] One of the programs she did not complete, and the other program did not lead to profitable employment.[6] Fern was a single mother of three children, received no financial support from their fathers, and often lived at a deficit.[7] Consequently, she contended that the student loan debt was a mental and emotional burden.[8] Additionally, Fern was receiving food stamps and rental assistance from the government.[9] The court found that Fern was maximizing her current earning potential and did not have any unnecessary expenses for a mother raising three children on her own.[10] Conversely, the creditors argued that because there were income-based repayment plans available to Fern, a finding of undue hardship was not warranted.[11] The court disagreed, however, holding that the payment plans imposed an additional burden on Fern.[12]
The Bankruptcy Code does not define undue hardship, and the circuits differ on the correct standard to apply.[13] The courts of the Eighth Circuit, which includes the Fern court, apply a totality of the circumstances test to determine whether excluding student loans from discharge would impose an undue hardship on the debtor.[14] The test includes a consideration of: “(1) the debtor's past, present, and reasonably reliable future financial resources; (2) the debtor's reasonable and necessary living expenses; and (3) any other relevant facts and circumstances.”[15] Contrastingly, other circuits apply the Brunner test, which requires debtors to demonstrate that repaying the debt would force debtors and their dependents below a minimal standard of living.[16] Applying the totality of the circumstances test, the Fern court found that the debtor’s past, present, and reasonably reliable future financial resources supported a finding of undue hardship.[17] Fern never earned more than $25,000 a year and was relying on family support and government assistance.[18] Moreover, there was sufficient evidence showing that she was maximizing her income.[19] The court also found that her expenses were reasonable and necessary, weighing in favor of discharge.[20] Further, the court concluded that the repayment plans proposed by the creditors would impose hardship, and there was a very low probability that Fern would ever make significant payments.[21] Accordingly, the court held that, under the totality of the circumstances test, Fern was entitled to a discharge of her student loan debt.[22]
In determining undue hardship, the totality of the circumstances test is a less restrictive approach; nevertheless, the Brunner test is the more widely used standard.[23] The Brunner test was originally established in 1987 to prevent students from taking advantage by filing for bankruptcy immediately after college.[24] Presently, the test is criticized for being overly narrow and not aligned with current times.[25] Due to fear of difficulty in discharging student loan debt, most debtors do not attempt to discharge their debt using bankruptcy.[26] Conversely, more circuits applying the totality of the circumstances approach may change that in the future. By applying a less restrictive analysis, the Eighth Circuit shows leniency to debtors of student loan debt.[27] Undeniably, the Fern court proved that it is not an impossible task to discharge student loans if the debtor can show the requisite undue hardship. Although the discharge exception for educational loans was enacted to prevent most debtors from discharging student loan debt,[28] the Eighth Circuit allows debtors who are truly incapable of paying their loans to have a fresh start.[29] This approach will likely increase the number of successful discharge cases in the future if other circuits adopt the Eighth Circuit’s standard. However, the courts may struggle to find a balance as potential problems arise if discharging student loan debt becomes more common.
[1] 11 U.S.C. § 523(a)(8) (2012).
[2] See Stephen Dash, Why Student Loans are so Difficult to Discharge in Bankruptcy, Forbes, Oct. 25, 2015, http://www.forbes.com/sites/stephendash/2015/10/25/why-student-loans-are....
[3] In re Fern, 553 B.R. 362 (Bankr. N.D. Iowa 2016).
[4] See id. at 371.
[5] See id. at 364–65.
[6] See id. at 365.
[7] See id. at 364–65.
[8] See id. at 364.
[9] See id. at 365.
[10] See id. at 368–69.
[11] See id. at 369.
[12] See id.
[13] See id. at 367.
[14] See id.
[15] Id. (quoting Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003)).
[16] See id.
[17] See id. at 368.
[18] See id. at 367.
[19] See id. at 368.
[20] See id. at 369.
[21] See id. at 369–71.
[22] See id. at 371.
[23] See id. at 367.
[24] See Dash, supra note 2.
[25] See id.
[26] See Jason Iuliano, Student Loans and Surmountable Access-To-Justice Barriers, 68 Fla. L. Rev. 377, 378 (2016).
[27] See Long v. Educ. Credit Mgmt. Corp (In re Long), 322 F.3d 549, 554 (8th Cir. 2003) (expressing its concerns with the Brunner test: “We are convinced that requiring our bankruptcy courts to adhere to the strict parameters of a particular test would diminish the inherent discretion contained in § 523(a)(8)(B). Therefore, we continue-as we first did in Andrews-to embrace a totality-of-the-circumstances approach to the ‘undue hardship’ inquiry. We believe that fairness and equity require each undue hardship case to be examined on the unique facts and circumstances that surround the particular bankruptcy”).
[28] See Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82, 87 (2d Cir. 2000).
[29] See In re Fern, 553 B.R. at 370–71.