Cal. Court Clarifies Student Loan Discharge Standard

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By Stephanie Cumings

Oct. 15 — To discharge student loans in bankruptcy, a debtor doesn't need to show that they've maximized their income, at least in the Ninth Circuit.

A three judge panel in an unpublished opinion said that some courts in the circuit, including the lower court in this case, have been misinterpreting prior cases and holding debtors to the wrong standard. Nevertheless, the court affirmed that the debtor in this case had failed to meet the “undue hardship” standard required to receive a discharge.

Standard Under Scrutiny

The standard to receive a discharge for student loans is higher than that for most other kinds of debts, and it has become the focus of criticism as student debt and default rates in the U.S. continue to rise. Courts have shown varying levels of sympathy for student debtors, leading to inconsistent results as to what factual circumstances actually merit granting a discharge.

In this case, the court said that “[a] reasonable person could disagree with Congress's decision to make it difficult to discharge student loan debt” and that “[a] reasonable person could also disagree with [the prevailing] interpretation of the Congressional standard.” However, the court said it was bound by the undue hardship standard used by most circuit courts, including the Ninth Circuit.

A case pending before the First Circuit could alter the legal landscape as that court is expected to finally provide its own interpretation of the undue hardship standard.

Brunner Test

The Bankruptcy Code says that student loans can't be discharged in bankruptcy unless forcing the debtor to repay them would impose an “undue hardship,” but this phrase is not defined. The Ninth Circuit, like the vast majority of circuit courts, has adopted the standard for undue hardship from Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).

The Brunner test requires that the debtor prove three things: “(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.”

Unemployed Since 2012

In this case, the debtor was a 44-year-old woman with three children, including a three-year-old and a one-year-old. Between 2000 and 2012, she had a series of short-lived jobs. She had been unemployed since 2012, staying home to take care of her children and living off government assistance and money from the fathers of her children. The bankruptcy court found that she was facing a budget deficit of $695 to $745 per month.

The bankruptcy court found that although the debtor had made a good faith effort to repay the loans, she didn't meet the other two requirements of the test and so it denied the request for discharge. Importantly, the bankruptcy court said that the first requirement could only be satisfied if it would be “unconscionable” to require the debtor to increase her income or decrease her expenses.

Maximizing Income Not Required

The appellate court said that there has been “confusion” in the circuit about whether this is the proper standard for the first prong of the test.

“However,” the court said, “the Ninth Circuit has stated that it has never required a showing of maximization of income to satisfy the first prong.” Therefore, the court said that “the bankruptcy court erred in requiring [the debtor] to prove that, under the first prong, she could not increase her income.”

The court said that a debtor's potential income is relevant to the determination of undue hardship, noting that “the Ninth Circuit has considered the debtor's ability to increase her income both as evidence of additional circumstances under the second prong” and “as evidence of a lack of good faith under the third prong.”

“In other words,” the court said, “the bankruptcy court erred, not by considering the debtor's potential income, but rather by considering it under the incorrect prong of the three-part test.”

‘Sympathetic' to Circumstances

But the court agreed with the bankruptcy court's other determinations and affirmed the denial of the discharge. The court found no error with the bankruptcy court's finding that there was nothing to indicate the debtor couldn't become employed in the future, even if it was for lower pay than she desired or not in her chosen field. The court agreed that the debtor's age was no barrier to future employment and that her income potential would likely increase once her younger children reached school age.

The court said it was “sympathetic” to the debtor's circumstances, but ultimately held that she “is capable of working and her financial situation will likely improve once she returns to the workforce.”

Judges Robert J. Faris, Meredith A. Jury, and Ralph B. Kirscher heard the case.

The debtor represented herself in this case.

Kevin Curtin of the Law Offices of Kevin Curtin, Seattle, and Kyle Seedorf of Taylor Anderson LLP, Denver, represented the creditor.

To contact the reporter on this story: Stephanie Cumings in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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