The principal aim of the consumer bankruptcy system in the United States has been to offer individuals the opportunity for a fresh start in their financial affairs. Reduced to simplest terms, a fresh start equates with relief from bad decision-making.
As a bankruptcy judge in the Northeast region of this country, I have witnessed a wide array of bad spending decisions. Consumer bankruptcy petitions are replete with examples of poor judgment: gambling debts, excessive purchases of luxury goods, ill-advised loan guarantees, unpaid income taxes and over-extended home mortgage loans, just to name a few. Yet Congress has weaved into the U.S. bankruptcy code and consumer protection legislation various forms of relief for consumers who failed to exercise good judgment in their spending. With limited exceptions, all of the lapses in judgment mentioned above can be cured through discharges in bankruptcy.
But Congress inexplicably continues to give a cold shoulder to consumers who are saddled with unyielding student loan indebtedness. Yes, there are a plethora of payment deferral options. But there is no relief under the bankruptcy code akin to the options available to consumers who made comparable poor spending choices. It is time for our bankruptcy laws to pull back on the harsh treatment of education loan debt.
The country's total student loan burden is more than $1 trillion, with the average borrower graduating with approximately $33,000 of education debt. Those who continue onto graduate school incur substantially more. Indeed, the vast majority of the clerks who come to work for me after law school are saddled with six-figure student loan obligations. How are these young adults going to buy homes, which may create work for roofers, painters, plumbers and other contractors? How will they afford to have families and save for retirement?
This looming crisis spans generations. Senior citizens have amassed over $18.2 billion of student loan debt, either through their own schooling or by acting as guarantors on their children's loans. Needless to say, this debt substantially impairs elderly adults' ability to enjoy retirement or handle long-term care and medical issues.
Bankruptcy laws were not always a roadblock to discharging student loan debt. Prior to the passage of our current bankruptcy code in 1978, educational loans were dischargeable like other consumer debts, without exceptions. The 1978 Bankruptcy Code and subsequent amendments implemented an exception for higher-education loans granted or guaranteed by the government, colleges and universities. These loans could be discharged if the borrower had made an effort to repay them for at least five years or if repayment created an "undue hardship."
In 1984, the time period after which a loan could be discharged extended from five to seven years. The Higher Education Amendments of 1998 eliminated made loans nondischargeable after any period of time, absent proof that the debt imposed undue hardship — an undefined term — on the borrower.
Without a statutory definition, courts have developed rigid standards for undue hardship which have virtually shut the door on student loan debtors seeking bankruptcy relief. More than half of our federal circuit courts of appeal apply an exceedingly high standard adopted by the Second Circuit Court of Appeals in a 1987 case, Brunner v. New York State Higher Educ. Serv. Corp.
Nothing better exemplifies the old adage "bad facts make bad law" than the lock-step response of most courts to the Brunner decision. In Brunner, the debtor received a bachelor's degree in social work in 1979 and a master's degree in 1982. Seven months after receiving her master's degree, she filed for bankruptcy under Chapter 7, and her outstanding debts were discharged, exclusive of $9,000 in student loans.
Representing herself in court, Brunner sought to discharge the student loan debt. The bankruptcy judge dismissed the obligation in an oral ruling. The New York State Higher Education Services Corporation, the guarantor of the loans, appealed the decision and obtained a reversal by the district court. Ultimately, the second circuit affirmed and embraced a rigid three-prong approach to determine whether an undue hardship exists. First, the burden must be so great 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. Second, additional circumstances must indicate that this state of affairs is likely to persist. Lastly, the debtor must have made good faith efforts to repay the loans.
The second circuit agreed that Brunner did not satisfy these criteria. In context, the decision is sensible. The amount of debt was not exceedingly high and Brunner sought a discharge within months of graduating, opting not to make meaningful repayment efforts.
What is troubling is that six circuit courts of appeal and dozens of bankruptcy courts continue to apply the Brunner standards in today's challenging financial environment. As it stands now, a debtor needs to show some disabling infirmity or condition of utter hopelessness in order to discharge student loan debt.
This is not to disparage the judges on these courts. I too must apply Brunner as it remains the law in the circuit in which I sit. Other judges may in fact feel, as I do, that the time is right to re-evaluate theBrunner standards. While it is possible for the courts of appeals to reconsider Brunner, a debtor would first have to have the resources and commitment to pursue an appeal to the highest appellate level short of the U.S. Supreme Court. A borrower struggling under a mountain of student loan debt is an unlikely candidate for this possibly quixotic venture.
I suggest the answer resides in Congress, which with little effort can amend the bankruptcy code to incorporate a less harsh and rigid definition of undue hardship or reinstate a reasonable waiting period.
I offer Congress an additional clue: look to the more flexible standard for undue hardship employed by Congress under the Bankruptcy Abuse and Consumer Protection Act of 2005. In short, Congress mandated that a debtor is not permitted to reaffirm debts — that is, agree to pay debts otherwise subject to discharge under bankruptcy — if those debts pose an undue hardship. In this case, undue hardship is defined as a situation in which a debtor's monthly net income simply is not enough to permit payment of the specific debt. Why not apply this standard when deciding whether the discharge of education loans is warranted?
In the end, it would be better for the country and the economy as a whole if individuals who have made reasonable efforts to repay education loans were permitted to discharge them under certain conditions. Once free from these obligations, individuals would be in a better position to actively contribute to the economy. Not only would they enhance our country's economic fabric by purchasing homes and consumer goods, they would be able to save for retirement and long-term care needs — thereby reducing the risk of future crises.
The Honorable Michael B. Kaplan is a bankruptcy judge for the district of New Jersey in Trenton. Prior to taking the bench, Judge Kaplan served as a Standing Chapter 13 Bankruptcy Trustee.