A 10-year court battle waged by Michael Hedlund, a graduate of Willamette Law School, to discharge his student loans has recently ended with a 9th U.S. Circuit Court of Appeals decision partially discharging his loans.
Hedlund borrowed about $85,000 to get his undergraduate and law degrees, then failed the bar exam three times. He ultimately took a job as a juvenile counselor. At 33, married and with a child, he declared bankruptcy. His case has potentially large implications for borrowers.
It's pretty well known by now that student loans cannot be discharged through the normal bankruptcy process.
Instead, Congress requires student loan borrowers to initiate an adversary proceeding, a separate lawsuit filed within the bankruptcy case, in which they have to prove that repaying their student loan debt would be an "undue hardship."
In the absence of any further guidance from Congress on what constitutes an undue hardship, most courts now apply what is called the "Brunner standard."
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That standard requires a borrower to prove three things: One, that the borrower and any dependents cannot maintain a minimal standard of living based on current income and expenses; two, that additional circumstances indicate this is likely to be the case for a significant portion of the borrower's repayment period; and three, that the borrower made a good faith effort to repay the loans.
The conventional wisdom is that the need for a separate proceeding – for which many bankrupt borrowers will be unable to afford a lawyer – and the stringency with which courts apply this standard make it virtually impossible for borrowers to discharge their student loans. And, in some respects, Hedlund's case confirms this.
Hedlund was represented pro bono by Morrison and Foerster, one of the top bankruptcy firms in the country, which is unlikely to be an option for most borrowers. And, of course, Hedlund was a law school graduate himself.
It's also notable that, due in part to some unusual circumstances such as a judge passing away, it took Hedlund nearly 10 years to earn the partial discharge. Many borrowers will not want to persist through litigation nearly that lengthy.
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On the other hand, Hedlund settled with one of the holders of his student loans shortly after filing his adversary proceeding. Just the possibility of obtaining a settlement should encourage needy borrowers to move forward with an adversary proceeding.
As important for future plaintiffs, the 9th Circuit Court also upheld the bankruptcy court's relatively reasonable application of the facts in Hedlund's case to the Brunner standard.
For example, the 9th Circuit Court agreed there was considerable evidence the family's expenses, including two cell phones for the family and leasing a reliable car could be seen as reasonable and that the excess expenses – including cable and children's haircuts – could be deemed marginal.
The bankruptcy court had also rejected arguments that Hedlund should find another part-time job while noting that his wife could be expected to work three days a week rather than one. The 9th Circuit Court agreed with this analysis as well, holding there was considerable evidence Hedlund had maximized his income and declining to attribute his wife's underemployment to bad faith. These parameters provide hope – and, more importantly, good precedent – for future plaintiffs who want to earn discharges without suffering complete material deprivation or working abnormally long hours.
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The 9th Circuit Court also upheld relatively reasonable parameters regarding the effort Hedlund had to make to repay his loans. For example, it agreed with the bankruptcy court that Hedlund was justified in rejecting repayment options offered by his loan servicer that would have entailed monthly payments he could not have afforded and that would still have meant repaying his loans for thirty years.
Overall, Hedlund's case is hopeful precedent. Borrowers should also be aware of a study by Jason Iuliano which suggests that in 2007 alone, there were 69,000 borrowers who were good candidates for relief but fewer than 300 actually attempted to discharge their loans. Iuliano's study also finds evidence that plaintiffs filing adversary proceedings on their own are as likely to prevail as those with attorneys.
The Student Loan Ranger continues to lobby for legislation such as The Private Loan Bankruptcy Fairness Act of 2013 and The Fairness for Struggling Students Act of 2013 that will restore fairness to the bankruptcy code for private student loan borrowers and to advocate for legislation that will reinstate bankruptcy protections for federal student loan borrowers. In the meantime, Hedlund's experience and Iuliano's study argues that more borrowers in bankruptcy should assert their rights under the undue hardship standard – even if they have to represent themselves.
Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.