In a comprehensive report issued last week, the American Bankruptcy Institute Commission on Consumer Bankruptcy proposed recommendations that would allow student loans to be easier to discharge in bankruptcy, citing the staggering $1.5 trillion in student loan debt held in the United States and the current difficulties with discharging this type of debt in bankruptcy.
Specifically, the Commission recommended a return to the pre-1998 “Seven-year Rule,” pursuant to which student loans may be discharged in bankruptcy seven years from the time that they first became payable. In addition, the Commission recommended that prior to seven years, courts should continue to make a determination of undue hardship when deciding whether to discharge a debtor’s student loan debt.
Citing congressional history, the Commission urged a return to legislation passed in 1990, which lengthened the period before a student loan became freely dischargeable from five to seven years after it first became due. Congress deviated from the Seven-year Rule in 1998, when it eliminated the time period after which student loans became freely dischargeable and enacted a rule that student loans were not dischargeable at any time absent the debtor’s showing of undue hardship. In 2005, Congress expanded the 1998 rule by adding private educational loans to the list of non-dischargeable student loans.
In making its recommendation, the Commission discussed the body of case law that has developed regarding what a debtor must show to establish undue hardship in the student loan context, starting with the seminal case of Brunner v. New York State Higher Educ. Serv. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987) (setting forth three-part “Brunner-test” to determine undue hardship, including good faith effort to pay debt, inability to maintain acceptable standard of living, and unlikely improvement of situation). Courts have widely applied the Brunner-test to determine whether a debtor’s student loan is dischargeable due to undue hardship. According to the report, “Brunner’s three-factor undue-hardship standard can allow appropriate bankruptcy relief during a period when discharge of student loans is not otherwise available.”
According to the report, the Commission’s recommendation of the Seven-year Rule in conjunction with the Brunner-test prior to seven years is “intended as a package and represent[s] a practical, middle-ground approach that will provide meaningful changes while respecting the traditional protections for student loans.”
Troutman Sanders will continue to monitor developments in bankruptcy law pertaining to student loans.