New Hope for Student Loan Borrowers in Bankruptcy?

As a Bay Area bankruptcy attorney, one of the most frustrating aspects of my job is being unable to help debtors discharge their student loans. As many people with huge student loan debt already know, the 2005 change to the bankruptcy code, coupled with court decisions, have made it nearly impossible for someone to discharge their student loan debt in their bankruptcy. The student loan “exception” to discharge puts student loans in the same category as debt obtained through fraud and back alimony and child support. Obviously this result is absurd but until now, little has been done about it.

In a new Ninth Circuit Bankruptcy Appellate Panel decision, the court reviewed Ninth Circuit case law concerning the discharge of student loans. The controlling Ninth Circuit decision is In re Pena, which specifically adopted the decision of the Second Circuit in In re Brunner. Under the Brunner/Pena test, in order for a debtor to discharge a student loan in their bankruptcy, they must be able to show: (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) the debtor must have made good faith efforts to repay the student loans.

For many reasons, proving all three of the above factors is incredibly difficult. The Ninth Circuit Bankruptcy Appellate Panel’s decision in In re Roth, acknowledges this difficulty. The opinion itself reverses the bankruptcy judge’s decision that the debtor in Roth did not meet the third prong of the Brunner test because she failed to “make good faith efforts to repay the student loans.” In an interesting analysis, the court made the point that it was next to impossible for the debtor to pay the student loans and so requiring her to attempt to pay was pointless. The court noted the basic tenant that the law does not require a party to engage in futile acts. Finding that the debtor met all three prongs of the Brunner test, the court allowed the student loan debt to be discharged in the debtor’s bankruptcy.

What is truly wonderful about this opinion is Judge Pappas’ concurring opinion. In his concurrence, Judge Pappas calls out the problems with the Brunner test and calls on the Ninth Circuit Court of Appeals to reexamine this test and come up with a better one. Judge Pappas argues that bankruptcy judges should be able to examine the totality of the debtor’s circumstances when deciding whether their student debt should be discharged. The reasons behind this are many but the following excerpt of the opinion is significant:

“Unlike in Brunner and Pena, today, bankruptcy courts must frequently attempt to predict a debtor’s potential to repay a six-digit educational obligation over his or her entire lifetime. In many of those cases, the benefit the debtor received from the education or training financed with these “loans” may be marginal, and the balances due to creditors exceed the debtor’s debt-service abilities. It would seem that in this new, different environment, in determining whether repayment of a student loan constitutes an undue hardship, a bankruptcy court should be afforded flexibility to consider all relevant facts about the debtor and the subject loans.”

While this is only a concurring opinion and while BAP decisions are not binding, let’s hope this decision is the start of significant discussion and change to the student loan case law in the Ninth Circuit.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code