Stacy Bediako

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Many saw the misuse of the bankruptcy system as a way of discharging student debt as unethical and a threat to the whole federal loan program. As a result, Congress progressively improved the bankruptcy protection for creditors of student loans and, in 2005, modified the Bankruptcy Code to extend this safeguard  to even  private, profit-oriented creditors (Baker  1214-  1215). Congress started by making student loans non-dischargeable in bankruptcy in 1976 when it revised the higher Education Act of 1965. Specifically, Congress, in § 439(A) of this Act, made educational loans non-dischargeable in bankruptcy proceedings unless over five years have ended since a debtor started repaying, and not dismissing the student loans would inflict undue hardship on the debtor and his or her dependents (Mueller 232). Nevertheless, the worry of widespread abuse of student loan debt at that time was mostly based on unreliable evidence. As confirmed by Mueller (232), in spite of the fear of Congress, empirical studies carried out lately have established that when Congress amended the Higher Education Act, under one percent of all student loans were cleared in bankruptcy. Thus, the exemption of the federal student loans trout discharge in bankruptcy proceedings was not necessary.

The enactment of the Bankruptcy Reform Act in 1978 by Congress led to the shifting of the exception of federal student loans to bankruptcy discharge from the Higher Education Act of 1963 to the United States Bankruptcy Code at 11 U.S. Code § 523(a)(8) (Mueller 233). It is crucial to highlight that the bill written in the House had recommended the reversing of the 1976 reforms but the version of the Senate prevailed. Notably, § 523(a)(S) exempted the dismissal of any debt to a non-profit (not-for-profit) higher education institution or governmental unit tor a student loan unless the loan first became payable 5 years prior to the bankruptcy filing. or excluding the debt li one dismissal would inflict an “undue hardship” on the borrower and his or her‘ dependents (Mueller 233).

Congress expanded the protection for lenders in 1979 to include student loans guaranteed. insured, or iridate by a not-for-profit higher education institution or a governmental unit (Baker 12 I S). Specifically, the meaning of this amendment was that loans required only to be insured of guaranteed. and not necessarily dispensed, by the national government for Lenders to get protection in bankruptcy (Baker 1218). The “of higher education” phrase was eliminated by the 1984 Bankruptcy Amendments and Federal Judgeship Act from “nonprofit institution.” Specifically. Congress made this change to include federal student loans made by not-for-profit institution centers, which were not concentrated on higher education. As Baker (1218) reports, this amendment of the language was aimed at protecting private student loans, which a nonprofit or governmental entity guaranteed or financed in any part.

Congress expanded the protection for lenders in 1979 to include student loans guaranteed. insured, or iridate by a not-for-profit higher education institution or a governmental unit (Baker 12 I S). Specifically, the meaning of this amendment was that loans required only to be insured of guaranteed. and not necessarily dispensed, by the national government for Lenders to get protection in bankruptcy (Baker 1218). The “of higher education” phrase was eliminated by the 1984 Bankruptcy Amendments and Federal Judgeship Act from “nonprofit institution.” Specifically. Congress made this change to include federal student loans made by not-for-profit institution centers, which were not concentrated on higher education. As Baker (1218) reports, this amendment of the language was aimed at protecting private student loans, which a nonprofit or governmental entity guaranteed or financed in any part.

The year 1987 saw the inception of a three-factor test, also known as the Brunner Test, after the U.S. Court of Appeals for the Second Circuit case where the Standard originated. Several courts, including the U.S. Courts of Appeals for the 2″‘, 3″, 4“’, 5’h, 6* 7’”, 9*, 10 “, and 11” circuits, use Brenner Test to ascertain if one can meet the undue hardship requirement for discharge of student loans (Fletcher and Waste 42). The United States Bankruptcy Court for the District of Colombia also uses this test. Specifically, Brunner (three-factor) test provides that an educational loan borrower can receive a bankruptcy discharge only by demonstrating that ( 1) he or she has made good faith attempts to pay back the loans; (2) he or she cannot sustain a “minimal” living standard while refunding based on his or her “current expenses and income “: and (3) “further conditions” show that there is a likelihood for this situation to continue liar a substantial portion of the period of repayment (Hunt 240). Many courts, particularly the courts highlighted above, have interdicted “undue hardship’ to require the borrower lo demonstrate the three things above. However, not all courts utilize the Brunner Test. A number of bankruptcy courts look at entirety conditions that comprise all factor’s applicable to a borrower’s hardship argument.

Notably, the Brunner Test has continued to be the same since its inception but the student loan dismissal provision within the bankruptcy code has been evolving over the years (Murphy 408). The period prior to which bankruptcy proceedings could start was extended by the Crime Control Act of 1990 to seven years following the commencement of the repayment (Pandit 308). Moreover, this Act widened the form of educational loans excluded front dismissal and set forth the language that is found in the present version of § 523(a)(S) (Pandit 30h). In 1991 , the High’s Education Technical Amendments eradicated the 6-year statute of limitations on defaulted loans collection that had been instituted in 1985 (Cloud and Fossey 476).

The pieces of legislation that Congress continued to pass were even less generous to student borrowers. As Freeman (I 47) emphasizes, since the passage of the Bankruptcy Code, Congress has pursued increasingly stricter standards, continuously tightening the scope of when student borrowers could obtain a discharge. For instance, the enactment o1’ the Higher Education Amendments of 1998 led to the eradication of the 7-year period prior to› which student loan debt could possibly be removed via bankruptcy proceedings (Pashmina 605). As a result, this left only the undue hardships exemption to non-dischargeable. The enactment of the Bankruptcy abuse Prevention and Consumer Protection Act {BA PCPA) of 2005 led to the expiating of every qualified education loan, including most private student loans, fi out discharge. According to Ashcraft et a1. (I). this legislation made fi ling for personal bankruptcy costlier.

The student loans are ex emptied from discharge or dismissal absent undue hardship under the current § 523(a)(8) of the United States Bankruptcy Code. In particular, education debt (educational benefit overpayment or loan) is excepted from discharge in Chapter Seven bankruptcy and Chapter Thirteen Bankruptcy under 1 1 US Code § 523(a)(S) if: (a) it is a student loan instead, guaranteed, or made/advanced by the government, (b) it is a student loan advanced under a loan program financed by a not-for-profit, (c) it is a student loan advanced under a loan program financed by the government, (d) it meets the criteria of the internal Revenue Service to be qualified education loan, and (e) it is an educational stipend, scholarship, or benefit (Tate). Today, student borrowers face the toughest impediments to student loan debt discharge they have ever faced.

The student debt crisis necessitates urgent action to lessen its effects on people, their relatives, their communities, and the wider economy (Hansen and Shaw 1). As a standard for student loan debtors, the Brunner Test is too harsh. According to Burke Ill (109), this test is too harsh since it forces the student-loan borrower to continue being in debt following his or her to link for bankruptcy, and this defeats the whole aim of bankruptcy. Regarding how the bankruptcy policy should be changed to balance the competing interests of alleviating the burden levied on student debtors versus preventing abuse by borrowers, Congress ought to adopt an even standard for “undue hardship” for the reason that the U.S. Constitution calls for uniform bankruptcy laws. Congress, as Williams (230) recommends, Ought to adopt a test, which integrates the strengths of” the Totality of the Circumstances, Brunner, Johnson, and Bryant tests. Notably, the Totality of” the Circumstances test (which took a more pardoning approach for the borrower than the BrIf£2»er Test) was created by the 8″ Circuit to ascertain if a borr ower was facing an undue hardship (Burke III 104-105). lt is crucial to note that only two Circuits, the

First and Eighth Circuits, do not use the Brummer Test. The Johnson (which comprises a policy test, a good-faith test. and a mechanical test) was crafted in 1979 by tic United states District Court for the Eastern District of Pennsy lvania. As maintained by Farina (1637-1638), this test requires a borrower to meet the mechanical test and either of the other two tests to prove undue hardship. The Bryant test was developed out of an amendment to the Johnson Test. It tried to inject an objectivity component into the johnson Test by utilizing the national poverty guidelines as a foundation or basis for the financial condition of a borrower (Ha 1518).

Courts should use a test that only looks at the borrowers’ potential and current incomes as compared to their expected and present future expenses (Williams 230). The student loans should only be discharged if the borrowers are incapable of repaying their debts and would be unable to pay back for the period of the loans while sustaining minimal living standards. Williams (230) also suggests that a good faith approach such as the one in Brunner and Johnson tests ought to be applied as well to make sure that student-loan borrowers are endeavoring to maximize income while decreasing expenditures. Williams maintains that courts ought to look at the reasonableness of the expenses of the borrowers and ascertain if they are spending frivolously.

This approach would similarly consider extraordinary situations, for example, dependents, marital status, and medical conditions, all of which would impact the expenditures a borrower should reasonably have.

Considering the current student debt crisis, bankruptcy law and bankruptcy courts should be used to resolve the student loan dilemma to a large extent. Specifically, bankruptcy law and bankruptcy courts would prevent lenders of strident loans from applying aggressive collection tactics and allow debtors to have a new stan. Additionally, the use of bankruptcy law and bankruptcy courts would benefit the lenders by decreasing the risk of lending and student-loan

borrowers by increasing the accessibility of loans. Bankruptcy policy can be made part of the larger national policy approach to remedy the crisis funding higher education by the federal government by involving other stakeholders (including state governments, educational institutions, students, and borrowers) in devising and implementing new models o I tackling debt, which addresses its (federal government) role and the roles of these stakeholders in the crisis.

Work Cited

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