The Next Term: Could SCOTUS make student loans dischargeable in bankruptcy?

September 5, 2012

Looking ahead to SCOTUS(Editor’s note: The Supreme Court will start to hear oral arguments for its 2012 term on October 1.  In preparation, we’ll be looking at major cases  that will be or may be before the Supreme Court throughout the month of September).

I probably don’t have to tell this to you, but student loan debt is a heavy burden for many college and law school graduates, especially those still searching for gainful employment.

What makes this debt even more burdensome – if only psychologically – is that it is nearly impossible to discharge this debt through bankruptcy.

However, a Connecticut lawyer is asking the Supreme Court to change that.

The lawyer, Roger Traversa, petitioned pro se to discharge his student loan debt in October of 2006 shortly before he received his Chapter 7 discharge in December of that year.

Traversa had to file separately to discharge his student loan because of 11 U.S.C. § 523(a)(8)’s requirement that a debtor seeking to have student loans discharged in bankruptcy file separately to make a showing that not discharging them would “impose an undue hardship.”

What exactly imposes an “undue hardship?”

The 1987 Second Circuit of Appeals case Brunner v. New York State Higher Educ. Services Corp. has the answer.

To demonstrate an “undue hardship,” a debtor must show by a preponderance of the evidence that:

  1. He will be unable to maintain a “minimal standard of living” for himself and his dependents if forced to repay the loans;
  2. “Additional circumstances” exist indicating that state of affairs creating undue hardship is likely to persist for a “significant portion of repayment period”; and
  3. The debtor has made good-faith efforts to repay loans.

I said earlier that “it is nearly impossible” to discharge student loan debt because this is an extremely difficult standard to meet.

How difficult?

Only around 0.05% of all debtors filing for bankruptcy with outstanding student loan debt actually see that debt discharged.

Traversa is arguing, among other things, that the Brunner standard (specifically, the second prong) is vague and requires a “certainty of hopelessness” over the debt’s repayment.

In other words, the debtor has to almost conclusively prove that his job prospects will never improve, something that can only be truly demonstrated in cases involving a significant, long-term injury or medical condition.

To make his petition more appealing to the Supreme Court, Traversa also makes several arguments in his petition for certiorari about how there are splits in the circuits on certain points of the Brunner standard, and about how “undue hardship” is ripe for Court review.

I have to agree with that last argument.

Brunner is 25 years old, and bankruptcy law has substantially changed since the decision.

And the biggest of these changes came in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) (see this post for a short overview of the Act).

Before the BAPCPA, private student loan debt was perfectly dischargeable, and government-backed educational debt was automatically discharged if payments on the loan were due at least five years prior to the date of the filing of the petition.

If a debtor was seeking discharge of government-backed loans less than five years after they came due, the debtor had to prove “undue hardship.”

This is the “undue hardship” that Brunner interpreted.

After the BAPCPA, all student loan debt is nondischargeable absent the aforementioned “undue hardship” showing.

If Brunner were decided after the BAPCPA was passed, would the decision have been the same?

Probably not.

In addition to the Draconian new terms introduced by the BAPCPA, the size of the average student loan debt burden has exploded since 1987 (I could probably cite quite a few sources on this, but chances are, you’ve already read something about it already).

In short, the “undue burden” of 1987 is dramatically different from the “undue burden” of 2012, and our case law should be updated accordingly.

Obviously, this means that I believe the Supreme Court should grant certiorari to this case.

But will they?

I think it’s unlikely.

The alleged split among the circuits isn’t as stark as the Court normally likes in its cases, and this Court has been particularly unsympathetic to bankruptcy debtors.

However, considering how close to home this issue hits for the Justices, their clerks, and Court observers, it’s entirely possible that the Court will hear the case.

With the past several years copiously demonstrating Congress’s complete lack of will to tackle this issue, the Supreme Court may be many debtors’ own hope for relief from student loan debt.