For many years now, bankruptcy has provided no relief for virtually all student loans. The Bankruptcy Code makes them non-dischargeable except in cases of “undue hardship”, but Congress chose not to explain or define what that test might entail. Decades ago, when student loans could be discharged after 5 years, the 2d Circuit Court Appeals created a very high barrier to proving “undue hardship” under the “Brunner test”. That test has been adopted in many but not all other Circuit Courts of Appeal. Under that test, one must show almost no future capacity to pay, and show a good faith attempt to pay in the past.
Now, Bloomberg Business reports that a court case challenging the Brunner Test as unconstitutional may be headed to the US Supreme Court. “The Supreme Court may weigh in on a student debt battle”, October 19, 2015. The case was brought by a 57 year old recovering alcoholic, saddled with debt after business and law school. He lives with his mother and has been unable to find work due to a criminal record.
As the author points out, “It would be hard to overstate the significance of this case for people struggling with student debt. Student loans are the largest source of consumer debt aside from mortgages. The total amount of outstanding student debt is expected to double to $2.5 trillion in the next decade. One in four borrowers is either delinquent or in default on his or her student loans. A ruling in their favor would offer an escape from a type of debt that, until now, has followed even the most destitute borrowers to their deaths. A change in how loans are handled in bankruptcy would open the possibility of a fresh start for defaulted borrowers, who may see their loan balances balloon with fees and penalties while they don’t make any progress toward paying down their debt.
For the government, the stakes are about as high. If bankruptcy becomes a real option for people with student loans, the Education Department will have to contend with the reality that a good chunk of the $1 trillion-plus in outstanding debt is not ever going to be recovered.”
The Supreme Court does not have to agree to hear the case, but may well do so, as this long-simmering problem has now evolved into a “split between the Circuits”, and may appeal to justices who dislike judge-made rules which cannot be supported by the language, structure and history of a statute.