A Certainty of Hopelessness: Debt, Depression, and the Discharge of Student Loans under the Bankruptcy Code

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I. INTRODUCTION

In 1978, Congress began to place strict limits on the dischargeability of student loans pursuant to the Bankruptcy Code, and has continued to increase these restrictions in the thirty years since. (1) Currently, courts consider whether to discharge student loans using harsh tests that require debtors to show a "certainty of hopelessness." (2) Under such rigorous standards, many deserving debtors with serious mental health problems have been denied discharge of their student loans. This paper will discuss the history of the dischargeability of student loans and the various tests currently used by the courts, as well as how mental health issues affect the outcome of dischargeability actions. Courts have struggled with mental health issues and their affect on dischargeability since the restrictions were added and will continue to do so without further guidance from Congress establishing a uniform standard for discharge.

II. THE HISTORY OF THE DISCHARGEABILITY OF STUDENT LOANS

Under the United States Constitution, Congress is authorized "[t]o establish ... uniform [l]aws on the subject of [b]ankruptcies." (3) The first legislation on the subject was the Bankruptcy Act of 1898, passed in order to give debtors the opportunity for a fresh start as well as provide uniform treatment for all debtors and creditors. (4) Government-backed student loans were decades from existence at the time, so the 1898 Code was mute on the subject. As a result, once created, student loans were generally dischargeable without limitation until 1978. (5)

Student loans were first singled out as non-dischargeable in the 1978 Bankruptcy Code, which replaced the 1898 Code. (6) As more students began utilizing the student loan program, members of Congress became concerned that too many student-debtors were filing for bankruptcy after graduation in order to discharge their student loans. (7) As a result, [section] 523(a)(8) was added to the Bankruptcy Code, stating that an individual is not discharged from debt owed "to a governmental unit, or non-profit institution of higher education, for an educational loan." (8) Exceptions included loans that "first became due before five years before the date of the filing of the petition," (9) and situations that would "impose an undue hardship on the debtor and the debtor's dependents." (10) However, Congress did not elaborate on what exactly constituted an "undue hardship," thus it became the job of the courts to do so.

The next update to this section of the Code occurred in 1990, when Congress extended the original five-year exception to seven years and applied the restrictions to Chapter 13 actions as well. (11) In 1997, the National Bankruptcy Review Commission recommended that Congress eliminate [section] 523(a)(8) altogether, arguing that discharging student loans was consistent with the policy goal of encouraging education. (12) However, this suggestion fell on deaf ears--in 1998, Congress completely eliminated the time limitation exception in [section] 523(a)(8)(A), leaving only the strict undue hardship exception that was contained in [section] 523(a)(8)(B). (13)

Most recently, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) broadened the types of loans that were excepted from discharge under [section] 523(a)(8):

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of [Title 11] does not discharge an individual debtor from any debt --

(8) unless excepting such debt from discharge ... would impose an undue hardship on the debtor and the debtor's dependents, for--

(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. …