District Court Rules that 61-Year-Old Law Graduate's Failure to Participate in Loan Repayment Program Must be Included in "Undue Hardship" Analysis in Bankruptcy Proceeding

Student loans are the source of many an American's debt woes, especially in today's down economy. If you have ever looked into discharging your student loan debt through a bankruptcy filing, you have discovered that, while not impossible, discharging student loans in bankruptcy is extraordinarily difficult.

Student loans are not dischargeable in bankruptcy unless continued payment of those loans poses an “undue hardship” under Bankruptcy Code Section 523(a)(8). While the term “undue hardship” is not defined in the statute, in practical terms, the “undue hardship” standard has been applied extremely strictly. Speaking in broad terms, student loans cannot generally be discharged unless the debtor in question is physically unable to work and is unlikely to be able to obtain gainful employment anytime in the future. In fact, one federal judge has referred to the “undue hardship” standard as the “let's make it as tough as humanly possible to discharge a student loan” standard.

The federal government actually made it harder for debtors to discharge student loans in bankruptcy in 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed into law. Prior to BAPCPA's passage, privately funded student loans, as opposed to federally funded and federally guaranteed student loans, could potentially be discharged in a Chapter 7 bankruptcy proceeding. Under BAPCPA, the “undue hardship” standard applies to all student loans, whether federal loans or private loans.  

In one recent case, Educational Credit Mgmt. Corp. v. Bronsdon, a court ruling on the bankruptcy proceeding of a particularly luckless recent law school graduate chose not to make things any easier for her. Denise Bronsdon was sixty-one years old when she entered the Southern New England School of Law in 2002. Although she graduated in the top half of her class, she was unable to pass the Wisconsin bar exam upon her graduation in 2005, After failing the exam three times and finding herself unable to pay to take the exam again, she worked some temporary jobs, but was unable to find full-time employment and filed for bankruptcy. 

Ms. Bronsdon succeeded in convincing a Massachusetts bankruptcy court that her loans constituted an undue hardship. Her lender, however, appealed to the United States District Court for the District of Massachusetts. The District Court then ruled that the bankruptcy court erred when it failed to include the fact that Ms. Bronsdon chose not to participate in the D. Ford Direct Loan Program's Income Contingent Repayment plan in its undue hardship analysis. The bankruptcy court concluded that the loan repayment assistance program should not be part of the analysis because her participation in the program could have resulted in serious tax liability, but the District Court held that the bankruptcy court's conclusion as to Ms. Bronsdon's future tax liability was overly speculative. 

The District Court remanded the case to bankruptcy court and instructed the court to consider the loan repayment assistance program in its undue hardship analysis. In related news, the Supreme Court of the United States recently heard argument in United Student Aid Funds, Inc. v. Espinosa, a case in which a lender sued to challenge the confirmation of a debtor's Chapter 13 bankruptcy plan years after its approval by a bankruptcy court because the bankruptcy court did not apply an undue hardship analysis in ordering the discharge of interest owed on the debtor's student loan debt. The Court will decide whether an undue hardship analysis was necessary for the bankruptcy court's approval of the debtor's bankruptcy plan and its subsequent discharge of his student loan debt to be valid and final.