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The Fifth Circuit Finds a Way to Make It Even Harder to Discharge Student Loans in Bankruptcy

posted by Bob Lawless

On Tuesday, the United States Court of Appeals for the Fifth Circuit released an opinion that, if anything, makes it even more difficult to discharge student loans in bankruptcy. Writing for a three-judge panel in a case called In re Thomas, Judge Edith Jones reaffirmed the court's commitment to the existing case law and added yet another judicial gloss to the words of the statute. The opinion was a missed opportunity to return to a reasonable standard that allows debtors to discharge student debt in appropriate cases while still protecting the public fisc.

The debtor was over 60 years old, part of the trend of older filers in bankruptcy court. She had taken out $7,000 in student loans for two semesters of community college. Within a year after leaving community college, the debtor developed diabetic neuropathy, which left her unable to work at any job that required standing for any period of time. The debtor had to leave a retail job, a restaurant job, and a job at UPS. She lost a previous job at a call center after it was acquired by another company who then fired her within three months for wearing headphone and listening to music during her lunch break, a determination that probably not so coincidentally meant the debt was ineligible for unemployment insurance.

As bankruptcy mavens know, a debtor can discharge a student loan only upon a showing of "undue hardship." That standard dates from 1976 when the rule was that student loans were freely dischargeable after five years. If a debtor wanted an earlier discharge, Congress understandably imposed a higher burden. In 1982, the Second Circuit applied these rules and created what is called the Brunner test to define undue hardship: (1) the debtor cannot maintain a "minimal standard of living" while repaying the student loans, (2) that state of affairs is likely to persist, and (3) the debtor made a good-faith effort to repay the student loans. In 1990, Congress expanded the five-year waiting period to seven years. Given that a debtor asserting "undue hardship" was asking for an early discharge of student loans, it was somewhat understandable that courts would apply the undue hardship standard and Brunner strictly.

In 1998, however, Congress eliminated the time period after which student loans became freely dischargeable. Student loans were now only dischargeable at any point -- even years after they became due -- if the debtor could show undue hardship. Brunner and its progeny, developed under one legal environment, now were left to apply to an entirely different legal regime. The Fifth Circuit recites this history but ignores it.

Instead, the Fifth Circuit said all it had to do was apply the "ordinary meaning" of "undue hardship" and turned to the Oxford English Dictionary. "Undue" means "going beyond what is appropriate, warranted, or natural, or excessive." And "hardship" is a "state of want or privation." Lo and behold, isn't it obvious to all, then, that all of these words inextricably lead to Brunner? If not, then you have company. The Fifth Circuit itself said the plain meaning of all these words is that repayment of the student words would "impose intolerable difficulties on the debtor." How one set of ambiguous words -- "undue hardship" -- can have a plain meaning but need to be explained through another set of ambiguous words -- "intolerable difficulties" -- was not explained. What we have been left with is yet another judicial gloss on a statute that already has been buffed to a nice shine that obscures the original text.

The American Bankruptcy Institute's Commission on Consumer Bankruptcy issued recommendations on student loans. (Full disclosure: I was the Commission's reporter and am only speaking for myself here). In addition to proposing statutory changes such as a return to the 7-year period of nondischargeability and limiting nondischargeability only when the student is the debtor, the Commission made recommendations about application of the existing Brunner test. The Commission was composed of bankruptcy professionals with all sorts of different experiences that lead to a middle-ground approach on Brunner. From section 1.01 of the Commission's report:

The Commission recommends that courts properly understand the Brunner test by hewing closely to the statute, as appropriate judicial interpretive techniques require. Section
523(a)(8) directs the court to consider “the debt” and not some different contract the debtor and creditor might have made under different circumstances.

For example, courts should determine hardship based on the hardship imposed by the debtor's actual circumstances and not hypotheticals about what the debtor might be able to do. The debtor should have to make a showing under usual preponderance of the evidence standards and not the "certainty of hopelessness" that some courts have required. There is more I will leave to the report itself.

Even if it did not adopt the Commission's recommendation, the Fifth Circuit missed an opportunity to reform the Brunner test and bring it into line with more conventional judicial analyses. As Judge Frank Easterbrook -- hardly a proponent of novel interpretive approaches -- once noted courts need to be vigilant from letting a judicial gloss like Brunner override the statute itself. Hopefully, other courts will be more thoughtful in their approach and move the law in a more positive direction. If you are interested in reading more, I recommend the Commission's report as well as Bill Rochelle's thoughtful analysis of the Fifth Circuit's decision (behind a paywall but free to ABI members).


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