Student Loans and Bankruptcy

For individuals seeking to discharge debt through bankruptcy, student loans are unique in that they require a bankruptcy court’s determination that payment of said loans would impose an undue hardship on the debtor and the debtor’s dependents. 11 U.S.C. § 523(a)(8).

In determining what constitutes an “undue hardship” in this context, bankruptcy courts are split into two factions.  One faction follows the “Brunner” approach from the 1987 Second Circuit case: Brunner v. New York State Higher Education Services Corp.  In order to discharge a student loan under the Brunner approach, a bankruptcy court must find that: (1) the debtor cannot presently maintain a minimal standard of living if required to repay the student loan; (2) circumstances exist that indicate the debtor’s financial situation is likely to persist into the future for a significant portion of the loan repayment period; and (3) the debtor has made good faith efforts in the past to repay the student loan. The second faction takes a totality of the circumstances approach.  In order to discharge a student loan under the totality of the circumstances approach, a bankruptcy court must consider: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and the debtor dependent’s reasonable, necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. The First Circuit has not yet decided which approach ought to determine whether an undue hardship exists in this context, but the United States Bankruptcy Appellate Panel for the First Circuit found in the case In re Bronsdon that the totality of the circumstances approach “best effectuates the determination of undue hardship while adhering to the plain text of § 523(a)(8).”

When a debtor seeks to discharge student loan debts in bankruptcy, the Department of Justice (DOJ) and the Department of Education (DOE) are responsible for representing the interests of the United States. This responsibility includes deciding whether to recommend if a bankruptcy court ought to grant a discharge of student loan debts.  In November 2022, the DOJ released new guidelines on this topic.  The guidelines, which are applicable to both the Brunner approach and the totality of the circumstances approach, suggest that the DOJ and the DOE will coordinate to recommend discharge at a bankruptcy proceeding if the debtor presently lacks an ability to repay the student loan; the debtor’s inability to pay the loan is likely to persist in the future; and the debtor has made a good faith effort to earn income, manage expenses, and repay the loan.


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