Student Loan Crisis & Bankruptcy: Why Does Congress Allow This To Continue? (In re Duncanson)

By: Donald L Swanson

We have a student loan crisis in these United States. 

That crisis dates back to 2005, when Congress enacted one of the harshest-imaginable bankruptcy laws for student loans.[Fn. 1]  That 2005 law, in bi-partisan fashion:

• cemented the “certainty of hopelessness” interpretation. existing at that time under the “undue hardship” standard for discharging student loans;
• failed to include the opportunity to discharge a student loan after 7 years—a safety valve under the prior law that mitigated and justified the harshness of the “certainty of hopelessness” interpretation; and
• extended the non-dischargeability of student loans (beyond loans by the U.S. Government and by non-profits) to protect for-profit lenders.

Illustrating the harshness of the current law on discharging student loans in bankruptcy is this recent opinion summarized below, Duncanson v. Bank of North Dakota (In re Duncanson), Case No. 25-6001 (8th Cir. BAP, decided August 12, 2025).

As you read the following summary:

• keep in mind that this opinion is among the more-debtor-friendly of all student loan discharge cases—but it still runs the risk of getting reversed for being too-debtor-friendly;
• ask yourself how debtors like this can ever fund the process of seeking an “undue hardship” discharge (spoiler alert—they can’t); and
• ask yourself how and why Congress can’t / won’t do better for student loan debtors that need bankruptcy relief.    

Procedural Posture

Debtor files Chapter 7 bankruptcy and an adversary proceeding, seeking to discharge student loan debts owed to (i) U.S. Department of Education (“DOE”), and (ii) Bank.

Trial occurs in the adversary, followed by negotiations that fail to produce a settlement, resulting in a supplemental hearing sixteen months after the trial to update Debtor’s financial details. 

Then, the Bankruptcy Court rules, under § 523(a)(8),[fn. 2] that:

• not discharging one of Debtor’s student loans would impose an undue hardship;
• the student loan owed to DOE is not dischargeable; but
• the student loan owed to Bank is dischargeable.

Bank appeals to the Eighth Circuit BAP, which affirms (see opinion linked above).

Facts

After high school, Debtor attends a University but suffers financial and mental health issues.  After seven and a half years of study, Debtor:

• earns a Bachelor of Arts degree in physics, education, and communication; but
• obtains student loans from the DOE, having a balance at bankruptcy filing of $108,073.54.

After graduating, Debtor teaches science for a year but continues struggling with mental health issues.  So, Debtor moves closer to home and teaches math and life science for three years, making $23,000 a year.

Then, Debtor moves away and spends three years working for a pharmacy service.  Meanwhile, Debtor:

• enrolls in an engineering program at another University;
• earns a Bachelor of Science degree in mechanical engineering; and
• obtains student loans from Bank, having a balance at bankruptcy filing of $96,074.39.

Then, Debtor works at an ethanol plant as a night-shift plant supervisor. But the plant has an ethanol spill, and Debtor’s position is eliminated—but at no fault of Debtor.

So, Debtor moves back in with parents and can’t find a job—so, ends up:

• working intermittently for the next six years as a yoga instructor and delivering newspapers; and
• working on mental and physical health issues—such as undergoing gastric bypass surgery and losing 200 pounds.

Next, Debtor works for three and a half years—first as a design engineer making $58,000 a year but then, due to conflicts with a supervisor, at a lower-level position.

Then, Debtor moves closer to a sister in California, where Debtor is hired at an annual salary of $85,000—but is fired after five months, at which time Debtor’s former position is advertised at $20,000 less, leading Debtor to believe the firing was a cost-reduction move.

Trial & Beyond

At trial, Debtor is again unemployed—having been fired.  But five weeks later, Debtor begins an engineering job making $78,000 a year, which continues through the time of the supplemental hearing—at which time, Debtor is 50 years old.

The Bankruptcy Court finds:

• after taxes, Debtor will net $59,042 per year or $4,920 per month;
• Debtor has $3,925 in total monthly expenses, leaving $995 in discretionary monthly income; and
• Debtor has no significant assets—has only $2,500 in retirement savings, leases a car, and lives in a rented trailer on a chicken farm.

Legal Standards

Student loan debts are not dischargeable in bankruptcy “unless excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor’s dependents.” § 523(a)(8).

Debtors bear a “rigorous” burden of proving undue hardship by a preponderance of the evidence.

In the Eighth Circuit, a totality-of-the-circumstances test is used to determine undue hardship—a fact intensive test requiring a bankruptcy court to examine the unique facts and circumstances of the particular case.  Under this test:

• courts should consider: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable and necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case”; and
• “Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt—while still allowing for a minimal standard of living—then the debt should not be discharged.”

Standards Applied

In a de novo review, the BAP concludes that the Bankruptcy Court did not err in finding Bank’s debt dischargeable.  In doing so, BAP applies the following three factors.

First Factor—Past, Present, and Reasonably Reliable Future Financial Resources

Debtor consistently pursued and obtained jobs within Debtor’s career fields, first in teaching and then in engineering. When those jobs did not work out or were eliminated, Debtor found lower-level employment to earn income to survive and to pay on student loans.

The Bankruptcy Court properly took into consideration, (i) Debtor’s age (50 years) and remaining working years—including Debtor’s expressed hope of working until age 70, (ii) Debtor’s limited prospects for an inheritance, (iii) the negligible amount of Debtor’s retirement savings, and (iv) Debtor’s limited future financial resources.

Second Factor—Reasonable and Necessary Living Expenses

To be reasonable and necessary, an expense must be modest and commensurate with the debtor’s resources.

The Bankruptcy Court properly found that “Debtor’s expenses are reasonable and necessary to maintain a minimal standard of living,” including:

• Debtor’s discretionary income of $995 a month; and
• Debor’s need to use a portion thereof to catch up on retirement funding, having only $2,500 in retirement savings.

Third Factor—Other Relevant Facts and Circumstances

A wide range of facts and issues may be relevant to determining undue hardship, including the following.

–Mental Health

Bank argues that the Bankruptcy Court erred in considering Debtor’s mental health.  Such argument is misplaced:

• expert testimony concerning mental health is not required in student loan dischargeability cases—a debtor’s testimony about debtor’s own mental health may be considered; and
• here, Debtor explained the mental health issues, including counseling over the past 20 years, effectiveness and helpfulness thereof (e.g., losing weight after bypass surgery), costs thereof (as a reason for including a $225 monthly medical expense item in Debtor’s budget), and how Debtor can still work in Debtor’s fields of study.

The Bankruptcy Court properly found “a likelihood” that Debtor “will continue to work and make an income” that is “commensurate with” Debtor’s “education and experience.”

–Alternative Remedy

The Bankruptcy Court considered the availability of an income-based repayment plan for the student loan owed to DOE and the potential tax consequences of loan forgiveness at the end of the repayment period.

Such availability is a factor to be considered, as are hardships associated with such plans, including possible tax consequences.

Here, the Bankruptcy Court properly considered tax consequences from eventual debt forgiveness as “only one factor” in its third-factor analysis, along with:

• the likely interest growth of the debt during the repayment period;
• the effect of the debt on Debtor’s ability to obtain credit; and
• the mental and emotional impact of allowing the debt to grow during the repayment period.

–Other Third-Factor

The Bankruptcy Court also considered Debtor’s move to a trailer on a chicken farm to reduce monthly rent by half.

Discharge of Bank’s Loan

The Bankruptcy Court properly concluded that “not discharging at least one of the Debtor’s student loans would create an undue hardship.” It correctly acknowledges that the Eighth Circuit is an “all or nothing” jurisdiction, meaning the Bankruptcy Court:

• could not partially discharge a portion of each loan; but
• could evaluate each loan and fully discharge one and not the other.

The Bankruptcy Court analyzed each loan separately, including:

• Debtor’s $770 monthly payments to Bank before filing bankruptcy—over 100 payments in total; and
• by contrast:
  • only $1,300 had been applied to the DOE student loan; and
  • DOE offers various income-based repayment plans, while Bank’s post-consolidation loan terms are fixed and inflexible.

Conclusion

How can Congress allow the student loan crisis to continue, without making an adjustment to the Bankruptcy Code’s § 523(a)(8)?

—————————–

Footnote 1.  That law is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Footnote 2.  11 U.S.C. 523(a)(8) provides: “(a) A discharge . . . does not discharge an individual debtor from any debt— . . . (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.