By: Donald L Swanson
Lots of things are wrong with the student loan program in these United States. For example:
- It’s a corporate-welfare program for high-price colleges; but
- Their students pay the price.
Unfortunately, the safety valve protection for students (i.e., a bankruptcy discharge) has failed them—and made the problem worse!
Some bankruptcy courts and their appellate overseers insist that bankruptcy relief should not be available for student loans—even though the Bankruptcy Code specifically authorizes their discharge for “undue hardship” (§ 523(a)(8)).
Such courts have failed our students:
- By pretending that the phrase “undue hardship” actually means something akin to “a certainty of hopelessness”—and protect almost no one;
- By denying a discharge of student loans for nearly-destitute debtors; and
- By making legal fees exorbitant for students (even those experiencing “a certainty of hopelessness”) to get a discharge.
So . . . here are some questions:
- How do such courts get off being so harsh?
- How do such courts feel justified in plugging-up the bankruptcy safety valve that Congress established?
A recent opinion illustrates the problem: the Bankruptcy Judge works hard to grant a discharge of student loans for “undue hardship,” in the face of excessively-harsh precedents.
The opinion is Wolfson v. Devos (In re Wolfson), Adv. No. 19-50717, Delaware Bankruptcy Court (decided January 14, 2022, Doc. 34).
In Wolfson, the Chapter 7 Debtor files suit in Bankruptcy Court seeking a discharge of his student loans totaling $95,137.02. The Wolfson opinion results. What follows is a summary of that opinion
Student loans are dischargeable, under § 523(a)(8), only if repaying the loans would impose an “undue hardship” on the debtor and his/her dependents.
Courts have declared that the undue hardship test has three prongs:
- Debtor’s current income and expenses cannot maintain a minimal standard of living, if forced to to repay the loans;
- Such circumstances are likely to persist; and
- Debtor has made good faith efforts to repay the student loans.
Based on evidence presented, the Bankruptcy Court finds:
- Debtor has expended considerable efforts to repay the student loans—but without success;
- Debtor has been chronically un- or underemployed since graduating from college;
- Debtor’s sporadic full-time employment consists of low-paying gig work or jobs with little prospect of advancement;
- Debtor has avoided living in abject poverty only by significant financial support from his father;
- Debtor’s career prospects are unlikely to materially improve over time;
- Debtor’s inability to pay his student loans will persist;
- Debtor has never made a payment on his student loans, but that’s because he has never been in a financial position to do so; and
- Debtor’s efforts to search for gainful employment show good faith.
[Editorial Question: How can the Wolfson Debtor afford legal fees for this lawsuit and appeal? He can’t . . . which is another way to punish this debtor, those similarly situated, and the attorneys who represent them.]
Court Ruling & Rationale
Accordingly, the Wolfson student loans are dischargeable, based upon a sensible application of the “undue hardship” standard of § 523(a)(8).
Bankruptcy Courts and their appellate overseers have applied wide-ranging interpretations of the § 523(a)(8) “undue hardship” standard:
- Some opinions provide “most exacting interpretations” of the discharge standard (i.e., such opinions are harsh and “onerous”); but
- Such “exacting interpretations” will not be applied in this case because they are “unmoored from the original test and plain language” of the statute.
The Bankruptcy Court appears fearful of those “most exacting interpretations” on appeal.
The Third Circuit Court of Appeals (an appellate overseer for this case) insists upon the following:
- It dictates a strict construction of the “undue hardship” test; and
- It prohibits a consideration of any “equitable concerns or other extraneous factors.”
Translation: The Third Circuit demands very harsh results for students.
–“Severe” Policy Implications
Since the Third Circuit is the Delaware Bankruptcy Court’s appellate overseer, the Bankruptcy Court feels compelled to explain some “severe” policy implications of the harsh standard. Here are two implications.
First, a harsh standard “will do little to protect the integrity of the student loan system”:
- This Debtor “is unlikely to ever pay down a meaningful amount of his ballooning” student loan debt;
- Such fact will be unchanged by an income-based repayment plan; and
- So, “there is little benefit to the system in delaying the discharge” of Debtor’s student loans.
Second, the “fresh start” interest in this case “is fairly strong”:
- Debtor is 34 years old and remains dependent on his aging, retired father; and
- Debtor “faces an uphill battle in improving his situation, and his father’s support cannot continue forever.”
Accordingly, the competing policy concerns in this case “weigh in favor of granting the discharge.”
The Wolfson ruling, of course, was appealed—but the appeal is withdrawn. So, the ruling is now final.
The student loan program in these United States is broken—and probably beyond fixing.
So, it’s truly unfortunate that some of our bankruptcy and/or appellate courts insist upon making problems worse by requiring a harsh application of the “undue hardship” discharge—thereby plugging-up a safety valve established by Congress.
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