Section 523(a)(8) of the Bankruptcy Code excludes certain student loans from bankruptcy discharge, “unless the exclusion of such debt from discharge under this paragraph would impose undue hardship “. By its terms, section 523(a)(8) leaves open to statutory interpretation whether a debtor can obtain relief under the law if he demands repayment of all “those” debts would impose undue hardship while only requiring repayment of some “such” debts would not be. A recent ruling from the United States Bankruptcy Court for the District of Kansas provides a stark illustration of the issue as it follows Tenth Circuit precedent allowing a “partial discharge” in certain circumstances. Ultimately, the bankruptcy court granted a partial discharge as the total amount of all these debts exceeded $225,000.

In this case, Loyle v. US Dept of Ed., 2022 WL 567724 (Bankr. Kan. Feb. 24, 2022), debtors sought to forgive student loans totaling $435,320. Following a trial, the court assessed the evidence to determine whether the debtors faced undue hardship using the triple Brunner^[1] test, which required debtors to show:

(1) that the debtor[s] cannot maintain, on the basis of current income and expenditure, a “minimum” standard of living for [themselves] and [their] dependents if they are obligated to repay loans; (2) that there are additional circumstances indicating that this state of affairs is likely to persist for a significant portion of the student loan repayment period; and (3) that the debtor[s] Ha[ve] made good faith efforts to repay the loans.^[2]

Although the evidence showed that the debtors had a monthly disposable income of $1,749, the evidence also showed that this amount was less than the monthly interest accrued on the loans. Moreover, the evidence showed that the debtors were maximizing their income and that their situation was likely to persist for most, if not all, of the 25-year repayment period. Significantly, the debtors were in their 40s and were “not looking to repay their student loans right after graduation.”^[3] And since graduation, they had repaid about $45,000. Based on all the evidence, which is set out in much more detail in the notice, the court concluded that repaying their student loans in full would impose an undue hardship on the debtors under section 523(a) ( 8).

But the court did not release all student loans from debtors. Instead, the court considered whether “to exercise its equitable powers [under section 105(a)] to grant partial discharge of student loan debt,” and then concluded that $225,000 of debt was not dischargeable because debtors could repay that amount without undue hardship.^[4] Finally, the non-dischargeable debt was allocated on a pro-rata basis, so that a portion of each of the student loans was non-dischargeable.

Decisions like Loyle can open the door to government borrowers^[5] student loans guaranteed to discharge at least some of the student loan debt even if they cannot meet the strict standard of demonstrating undue hardship for the entirety of the debt.

FOOTNOTES

[1] Brunner vs. New York State Higher Educ. Serves. Corp., 831 F.2d 395 (2nd Cir. 1987).

[2] Loyle, 2022 WL 567724 at *7.

[3] Identifier. At 11 o’clock.

[4] Identifier. to *13.

[5] In August 2021, the bankruptcy protector wrote about recent rulings that allow debtors to discharge private student loans, as opposed to government-backed student loans, without the need to prove undue hardship. See “There is Consensus That Some Private Student Loans Can Be Forfeited in Bankruptcy”.