Source: https://www.abi.org/abi-journal/chaos-in-the-courts-the-meaning-of-undue-hardship-in-11-usc-523a8-and-the-argument-for
Timestamp: 2019-04-25 16:12:13+00:00

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Some aspects of federal bankruptcy law are not uniformly applied throughout the nation due to divergent interpretations of law rendered by different federal courts. One such non-uniform area is the law concerning the interpretation of §523(a)(8) of the Bankruptcy Code, which addresses the circumstances under which certain student loans can be discharged in bankruptcy. One author has identified at least six undue hardship tests,4 though it appears that two tests, the "Brunner test" and the "totality of the circumstances test," have emerged as the primary methods of judicial interpretation of §523(a)(8). This article provides an overview of the history and text of §528(a)(8), discusses the diverse judicial interpretations of the "undue hardship" tests set forth in §523(a)(8) (with an emphasis on the two distinct U.S. courts of appeals lines of cases), and argues that federal courts should adopt a modified version of the flexible totality-of-the-circumstances test as the uniform standard for assessing the propriety of granting a debtor a discharge of his or her student loan due to undue hardship.
In 1997, the National Bankruptcy Review Commission, which was tasked by Congress to conduct a comprehensive analysis of problems with the Code, recommended that §523(a)(8) be eliminated.11 Congress was not persuaded. Instead, when it next amended the Code in 1998, it eliminated the seven-year limitation period, which made all students loans non-dischargeable, absent a court determination that requiring debtors to meet their student loan obligations would constitute an "undue hardship."12 Clearly, Congress has progressively made student loans more difficult to discharge, and not the other way around. Consequently, both the text and history of §523(a)(8) lead to the conclusion that a debtor should bear a high burden in proving that a student loan debt is dischargeable.
The question with which federal courts have struggled is how to interpret the phrase "undue hardship."
The primary reason for the confusion in the courts is Congress's failure to define the term. Neither the term "undue" nor the phrase "hardship" are defined in the Code.14 Thus, the judiciary is obligated to provide meaning for them under applicable cannons of statutory construction. It is clear that the courts are obligated to interpret §523(a)(8) according to its plain meaning.15 Thus, analysis of the concepts of "undue hardship" should, logically, begin with an understanding of the noun "hardship," which is qualified by the adjective "undue."
The term "hardship" is defined in the Random House College Dictionary16 as "1. A condition that is difficult to endure; suffering; deprivation; oppression. 2. An instance or cause of this; something hard to bear.—Syn. 1. Affliction, trouble. Hardship, privation refer to a condition hard to endure. Hardship applies to a circumstance in which excessive and painful effort of some kind is required, as enduring acute discomfort from cold, battling over rough terrain, and the like." Webster's New American Dictionary17 defines the same term to mean "1. Suffering, privation. 2. Something that causes suffering or privation." Finally, Webster's New World Dictionary18 defines "hardship" as "1. Hard circumstances of life. 2. A thing hard to bear; specific cause of discomfort or suffering, as poverty, pain, etc.—Syn. See difficult." If a guiding principle can be culled from the foregoing definitions, it would seem to be that a hardship equates to "difficult-to-endure circumstances of life."
The same three sources were used to attempt to formulate a working definition of the concept of "undue hardship" by focusing on the word "undue." The definition of "undue" is more succinct: The Random House College Dictionary states that "undue" means "1. Unwarranted; excessive. 2. Inappropriate, unjustifiable; improper. 3. Not owed or currently payable." The definition in Webster's New American Dictionary is similar: "1. Not due; 2. Exceeding or violating propriety or fitness: excessive." Webster's New World Dictionary explains that the term means "1. Not yet due or payable, as a debt. 2. Not appropriate or suitable; improper. 3. Excessive, unreasonable; immoderate." These foregoing sources can be interpreted to agree that "undue" means inappropriate, unreasonable and unjustifiable.
When the meanings of the words "hardship" and "undue" are considered together, a fair reading of the phrase would be that a student loan is not dischargeable unless a debtor can prove that requiring him or her to repay the loan would impose upon them an inappropriate, unreasonable and unjustifiable set of circumstances that are difficult to endure. This definition would require the court to look not only at the debtor's circumstances (a quantitative component), but would also obligate the judiciary to delve into the reasons and justifications for such past, present and future circumstances (requiring a qualitative analysis). Such a standard would be faithful to the meaning of the text.
1. Mechanical Test. The court must ask: Will the debtor's future financial resources for the longest foreseeable period of time allow for repayment of the loan and be sufficient to support the debtor and his dependents at a subsistence or poverty level standard of living, as well as to fund repayment of the student loan? If the question is answered affirmatively, discharge of the loan must be denied. If answered negatively, then the court must apply the good-faith test.
(a) Was the debtor negligent or irresponsible in his efforts to minimize expenses, maximize resources or secure employment?
(b) If "yes," then would lack of such negligence or irresponsibility have altered the answer to the mechanical test?
If the answer to the first part of the good-faith test is no, then the debtor should be discharged of the obligation to repay his student loan. However, if the answers to both parts of the good-faith test are "yes," then a presumption against discharge is established—which may be rebutted by a negative answer to the third and final test.
(b) that the debtor has definitely benefitted financially from the education that the loan helped to finance?
As the foregoing quotation illustrates, the Johnson test is rather complex. Nevertheless, it contains several aspects worth retaining. For example, it requires the court to look at whether the debtor's foreseeable income would allow for reasonable support and payment of the loan, and it requires the court to examine the reason for the debtor's alleged hardship (i.e., whether the debtor engaged in negligent or irresponsible fiscal decision-making). The presumption against discharge written into the second part of the test makes little sense: The entire statute creates a presumption against discharge unless the debtor can prove an undue hardship. Further, there is nothing in the text or history of §523(a)(8) that precludes a debtor from filing bankruptcy for the dominant or even sole purpose of discharging a student loan (if sufficient cause exists), and therefore this factor should not be given such great significance in any analysis. A primary problem with the Johnson test is that it is overly quantitative in its approach, relies predominantly on current financial data and does not allow the court much discretion or leeway to delve into qualitative matters that might be relevant,29 such as the debtor's past conduct, or even mental or physical problems that might have an impact on the debtor's ability to repay.
Both the Johnson and Bryant tests are no longer in use in the Third Circuit, where they were established. In 1995, the Third Circuit rejected the Johnson and Bryant analyses in favor of the Brunner approach, discussed below. However, both Johnson and Bryant contribute value considerations to the dialogue concerning how §523(a)(8) should be applied: They both factor the federal poverty guidelines into their analyses, a consideration not expressly set forth in the Brunner test or the totality-of-the-circumstances test, and Johnson's inquiry into whether the debtor's budget problems were the result of negligence or irresponsibility (or even intentional, for that matter) is also useful. Whatever interpretation of §523(a)(8) the court eventually adopts as the uniform federal standard, it seems obvious that whether the repayment of the student loan over an extended period of time would force the debtor under the poverty level, for reasons beyond his or her control, should be part of the analysis. It is unlikely that Congress intended to hold student loans perpetually over the heads of the unfortunately impoverished.
The first U.S. appeals court to discuss the meaning of the term "undue hardship" in §523 was the Second Circuit in In re Brunner in 1987.33 Though Brunner was decided before the 1998 amendments to §523(a)(8), it has been applied post-amendment as well.
The Brunner test has been adopted as the controlling standard in at least seven other circuits,35 and is the clear majority view.
The Brunner test is not, however, without its own shortcomings. To begin with, it provides no objective standard to determine what constitutes a "minimal" standard of living. Use of federal poverty standards, as suggested in Johnson and Bryant, might provide a useful floor. A person who has a household income below the poverty level through no fault of his or her own, and who can show that his or her income is likely to stay so low for the time period the loan is in repayment status, would seem to have established a prima facie case of undue hardship. Further, the primary problem with the Brunner test is that it does not expressly provide for any examination into why the debtor is in his or her current financial predicament, which might properly be characterized as faulty or liability inquiry. After all, Congress obviously intended to limit the discharge of student loans to those persons who, for reasons beyond their control, would suffer an undue hardship by repaying the loans. A person suffering a current financial hardship due to events within his or her control should not be able to obtain a discharge.
Both the Brunner test and the totality-of-the-circumstances test have merit. However, the Brunner test does not provide for any inquiry into the reasons for the debtor's claimed past or current hardship (though it does provide for consideration of whether the hardship will extend into the future). Any inquiry into "undue hardship" must not only involve a determination as to whether a hardship exists, but must, as a matter of textual plain meaning, examine whether the hardship is undue (inappropriate, unreasonable and unjustified).
The Eighth Circuit's totality-of-the-circumstances test affords the bankruptcy courts the discretion needed to examine each case on its merits by looking at the debtor's past, present and likely future financial condition, as well as the reasons for the debtor's finances, and by assessing the impact that repayment would have on the ability of the debtor to provide a fair standard of living. The nine factors developed by lower courts within the Eighth Circuit, combined with some aspects of Johnson and Bryant, namely consideration of the poverty level as a baseline and the degree of the debtor's culpability for his or her financial problems, are useful and should be the law of the land.
The question of whether a student loan is discharged should be based on the unique facts of each case and not on the jurisdiction in which the case was filed. While both the Brunner and the totality-of-the-circumstances tests have advantages, the text and history of §528(a)(8) supports the conclusion that use of the more expansive totality-of-the-circumstances approach best fulfills the mandate established by Congress that student loans should only be discharged if, when all of the debtor's unique circumstances are taken into consideration, requiring him or her to repay the loan would impose an undue, and not a routine, hardship.

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