Treating Student Loan Debt Relief By Standardizing 'Undue Hardship' In Bankruptcy Code

In the interim, Biden's administration has sought to address student loan debt relief through another forum: the bankruptcy court. On Nov. 17, Biden's administration published instructive guidance to the Department of Education and the Department of Justice on how to treat student loan debt relief in bankruptcy court by standardizing the burden of "undue hardship" under Section 523(a)(8) of the Bankruptcy Code.

The Undue Hardship Standard

Generally, student loans may be discharged in bankruptcy only if the student loan imposes an "undue hardship" on the petitioning debtor. The "undue hardship" burden is not only undefined by Congress; it is a standard that has generally been granted only in exceptional circumstances. In interpreting whether a debtor's student loans pose an undue hardship on the debtor, courts either apply the Brunner test (Brunner v. New York State Higher Education Services, 831 F.2d 395 (2d Cir. 1987)), or the "totality of the circumstances" test. Under the totality of the circumstances test, a bankruptcy court considers: the debtor's past, present, and reasonably estimated future financial resources; the debtor's — and any dependent's — reasonably necessary living expenses; and other relevant facts or circumstances that are unique to the case that might prevent the debtor from paying the student loans in question while still allowing the debtor to maintain a minimal standard of living, even when aided by a discharge of other prepetition debts.