5th Circuit Upholds Undue Hardship Test to Discharge Student Loans in Bankruptcy Cases

The U.S. Court of Appeals for the Fifth Circuit recently upheld its “undue hardship” test to determine if student loan debt should be discharged in bankruptcy cases, even if this test results in holding sympathetic and less sympathetic debtors to the same standard.

The student debtor in this case suffers from diabetic neuropathy, which causes pain in the debtor’s lower extremities and requires that she not spend prolonged periods standing.  Unable to find sedentary work, the debtor was unable to make payments on her student loans and on other significant debts.  She filed for Chapter 7 bankruptcy and sought to discharge $3,500 in student loans by initiating an adversary complaint in bankruptcy court against the Department of Education.

To discharge student loan debt under the Bankruptcy Code, a debtor must show that debt would impose an “undue hardship” on the debtor if it is not discharged.  To prove “undue hardship” under what is called the Brunner/Gerhardt test, the Fifth Circuit requires, among other things, that the debtor prove (1) 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; and (2) that additional circumstances exist indicating that the current state of affairs is likely to persist for a significant portion of the repayment period of the student loans.

Both the trial court and the appellate court held that the debtor in this case proved the first prong of the Brunner/Gerhardt test, but had failed to demonstrate the second prong because she could not show that her present state of affairs would persist for a significant portion of the loans’ repayment period as she was unable to show that she is completely incapable of employment now or in the future.

On appeal, the debtor made a number of policy arguments, including that the Brunner/Gerhardt test is no longer good law as, from a practical and policy standpoint, it does not suit the times and such test should be replaced with a “totality of the circumstances” test.  Alternatively, the debtor argued that if the Brunner/Gerhardt test is still good law, then it should be applied to unsympathetic student loan default debtors, unlike herself.

The Fifth Circuit, affirmed the lower courts’ decision that the debtor failed the second prong of the Brunner/Gerhardt test and rejected her policy arguments against the use of that test or modifications to its application.  The Fifth Circuit concluded that Congress’s intent on establishing the “undue hardship” standard was to limit bankruptcy’s use as a means of offloading student loan debt except in the most compelling circumstances, and that the Brunner/Gerhardt test carries out that intent.  The court noted that the consequence of the current test of holding sympathetic and unsympathetic borrowers to the same standard should be addressed by Congress, if it so desires, and not by the courts.