Supreme Court Might Consider Ruling on Student Loan “Undue Hardship” Test

Under the Bankruptcy Code, a debtor cannot discharge student loan debt unless he can demonstrate that excluding that debt would impose an undue hardship. The test laid out by the 2nd U.S. Circuit Court of Appeals in the 1987 case of Brunner v. New York State Higher Education Services Corp (Brunner) has become the national standard in making that determination.

Recently, in Traversa v. Educational Credit Management Corp. (Traversa), a debtor petitioned the U.S. Supreme Court to hear his case regarding what level of proof is required in deciding undue hardship cases. The Supreme Court will consider the petition on September 24. If the Supreme Court does decide to hear the case, its ruling could have a significant impact on future bankruptcy student loan debt cases.

The Brunner test requires that a debtor prove by a preponderance of the evidence the following three points:

  1. Based on his current income and expenses, he cannot sustain a “minimal” standard of living if forced to repay his loans
  2. Additional circumstances exist that indict his current state of affairs is likely to continue for a significant portion of the repayment period
  3. He has made good-faith efforts to repay the loans

In Traversa, the debtor received a general release from his debts under Chapter 7 bankruptcy proceedings in a U.S. Bankruptcy Court. He then filed for release from his student loan debt as well claiming that it would be an undue hardship for him to repay the $60,000 he owed.

At trial, the bankruptcy court concluded that he met the first prong of the Brunner test, but that he did not provide sufficient evidence regarding the second prong that his financial situation was liable to persist for a significant portion of the repayment period.

During the case, the debtor testified that it was difficult for him to obtain and hold onto employment opportunities because of issues with depression, sleep disorders, ADHD and bipolar disorder. He argued that these difficulties showed that he met the second prong of the Brunner test.

The bankruptcy court, however, disagreed. It found that the medications he was taking for depression and the sleep disorders were helping him and, therefore, he should be able to find work. Further, the court concluded that he had not provided sufficient evidence of a bipolar disorder. Both the District Court and the 2nd Circuit upheld the Bankruptcy court’s decision.

In his argument to the Supreme Court, the debtor claims that his testimony provided a prima facie case of undue hardship and that the affirmed ruling created too high a standard. The lender/respondent, Educational Credit Management Corp., argues that that the debtor did not make a prima facie case regarding the likelihood of the persistence of his ailments and that all the courts applied the correct standard in making that determination.

It remains to be seen if the U.S. Supreme Court will even hear the case. If it does and determines that the debtor is in the right, it could make it easier for debtors to meet the requirements of the undue hardship test.

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Source: http://newsandinsight.thomsonreuters.com, “Supreme Court is asked for guidance on student loan ‘undue hardship’ test.”