Bankruptcy cases raise issue of proper undue hardship test

In our last post, we spoke a bit about student loans and bankruptcy, particularly the difficulty of having student loan debt discharged in bankruptcy. As we noted, bankruptcy courts will not discharge student loan debt unless a debtor is able to demonstrate that paying of that debt would constitute an undue hardship. Very few debtors are able to successfully do that under current case law, but it is possible that this could change.

Most courts of appeal handling the issue of undue hardship apply a test which looks at whether a debtor is able to maintain a minimal standard of living if he or she is required to pay back student loans. If not, the court will recognize an undue hardship. The eight circuit court of appeals, though, utilizes test which looks at the totality of the circumstances when determining whether an undue hardship exists. The latter test is easier to pass.

Two cases currently working their way through the appellate court system—one from the first circuit and another from the seventh circuit—could potential create an imbalance among the courts and draw attention from the Supreme Court.

The debate around the proper test for determining undue hardship is a complicated one, and the stakes are high, given the increasing number of grads with burdensome debt loads. Loosening up the requirements for discharging student loan debt in bankruptcy would bring relief to more grads, but the totality of the circumstances test still isn’t a free pass.

We’ll be keeping an eye on this issue, and will keep our readers apprised of any developments.