2nd Quarter 2014


In the spirit of graduation season, the staff at Across the Bar thought it would be a good idea to discuss an issue that affects recent graduates. In the spirit of being a bunch of lawyers, we picked the most depressing aspect of graduation: student loan debt. Indeed, there are more than a few articles suggesting that the next “big financial crisis” may involve the country’s growing student loan debt.

One article proclaims the class of 2014 as the “most indebted class ever,” with the average graduate owing $33,000 in student loans. For law school graduates the financial picture is worse. In 2013, Time magazine reported that the average law student graduated with over $100,000 in student-loan debt and the latest U.S. News data states that graduates from nearby law schools average over $140,000 in student loan debt.

In the past, most graduates, and particularly law school graduates, would not pay much attention to their student loan debt because they believed that their new well-paying jobs would pay off the loans in no time. In recent years the employment prospects for new graduates has not been so positive, particularly for law school graduates. Looming large over these new lawyers-in-waiting is the question of what will happen to them if they cannot pay off their loans.

Some student loan borrowers may consider the protections afforded under bankruptcy law. After all, they may have heard that bankruptcy offers people (and cities) the chance at a fresh start. Unfortunately, bankruptcy law does not dispatch with student loan debt so easily.

Since 1976, the Bankruptcy Code has excepted student loan obligations from the type of debts that are discharged in bankruptcy proceedings. Debtors must show that having to repay the student loan debt would “impose an undue hardship” on them and their dependents. Title 11 U.S.C. 523(a)(8). To determine whether student loan debt imposes an “undue hardship,” many courts, including the Ninth Circuit, apply the test set forth in Brunner v. New York Higher Educations Services Corp. 46 B.R. 752 (SDNY 1985).

The “Brunner Test” is a three-pronged test and the debtor must meet each prong in order to establish undue hardship. Specifically, the debtor must prove that:

1. He cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if required 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; and
3. The debtor has made good faith efforts to repay the loans.

United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1111-12 (9th Cir. 1998) (applying the Brunner Test).

The Court in Pena found that the debtor met the undue hardship standard and discharged his student loans. The debtor, Mr. Pena, had incurred over $9,000 in student loan debt to attend ITT Technical Institute in Phoenix Arizona and obtain a credential that was “useless to him,” did not help in employment and was not accepted as course credit at other schools. In addition, Mr. Pena’s wife suffered from a mental disability that prevented her from working. These facts and other circumstances led the court to conclude that the Penas could not maintain a “minimal standard of living” (their expenses already exceeded their income) if they had to repay the student loans. Those circumstances were unlikely to change, and they had made a good faith effort to repay the loans.

More recently, the Ninth Circuit issued a decision to grant a partial discharge to a debtor with over $85,000 in student loans, including loans to attend law school. Hedlund v. Educ. Res. Inst., Inc., 718 F.3d 848 (9th Cir. 2013). The debtor had failed the Oregon state bar exam twice and missed his third attempt after locking his keys in his car. Having lost his job at the district attorney’s office, unable to become a licensed attorney, and faced with mounting debt, the debtor filed bankruptcy. The case focused on whether the debtor acted in good faith. The court, noting that “[g]ood faith is measured by the debtor’s efforts to obtain employment, maximize income, and minimize expenses,” found that the debtor, before filing for bankruptcy, had made voluntary payments, endured wage garnishment, and made adequate efforts to pursue an alternate repayment plan, which constituted good faith.

Despite these two examples of debtors prevailing on their claims of undue hardship, the Brunner Test has been criticized for making it too difficult for debtors to discharge their student loans. Later cases have criticized and outright rejected the Brunner Test in favor of a more “lenient path.”

In 2010, the U.S. Supreme Court had a chance to weigh in on the undue hardship debate in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010). There, the bankruptcy court confirmed a debtor’s Chapter 13 Plan, which discharged his student loan debt. However, the debtor did not initiate an “adversary proceeding” (file a lawsuit in the bankruptcy court) to determine whether he met the undue hardship test. Ultimately the Supreme Court delivered a very narrow decision in which it confirmed that the bankruptcy court must make an undue hardship determination before discharging student loan debt, but that in this case the lender had notice of the pending discharge and failed to timely object to the student loan discharge.

Attorneys counseling clients that may be considering bankruptcy as an option to deal with their student loan troubles should be aware of the Brunner factors and understand that bankruptcy will not automatically “wipe away” the student loans. Obtaining a discharge of student loans will likely add a greater expense to the potential bankruptcy case.

RICHARDO “RICHIE” Z. ARANDA is an attorney with Herum Crabtree Suntag Law Firm practicing bankruptcy and civil litigation. Contact Richie at (209) 472-7700 or at