Student Loan Debt and Bankruptcy in DC — The Undue Hardship Standard

The conventional wisdom -- that student loans can never be discharged in bankruptcy -- is wrong. Student loans can be discharged. The problem is that the standard for discharge is higher than for other unsecured debts, the process requires a separate lawsuit within the bankruptcy case, and for decades the test applied by most courts made discharge nearly impossible to obtain. Recent developments, including updated guidance from the Department of Justice, are changing the landscape -- but the legal framework remains demanding.

For DC residents carrying student loan debt that they genuinely cannot repay, understanding the discharge standard, the litigation process, and the available alternatives is essential.

The General Rule: 11 U.S.C. Section 523(a)(8)

Under 11 U.S.C. Section 523(a)(8), student loans are excepted from discharge unless the debtor can demonstrate that repayment would impose an "undue hardship" on the debtor and the debtor's dependents. This exception applies to:

Loans made, insured, or guaranteed by a governmental unit or nonprofit institution.
Obligations to repay funds received as an educational benefit, scholarship, or stipend.
Qualified education loans as defined under the Internal Revenue Code.

The exception covers federal student loans (Direct Loans, Stafford Loans, PLUS Loans, Perkins Loans) and most private student loans. It applies in both Chapter 7 and Chapter 13.

The key phrase -- "undue hardship" -- is not defined in the Bankruptcy Code. Its meaning has been developed entirely through case law, and the standard varies by circuit.

The Brunner Test

The most widely applied test for undue hardship is the three-prong standard established in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). The debtor must show:

Current inability to pay. Based on the debtor's current income and expenses, the debtor cannot maintain a minimal standard of living for themselves and their dependents if forced to repay the student loans.
Persistence of circumstances. Additional circumstances exist indicating that the debtor's financial situation is likely to persist for a significant portion of the repayment period. Temporary financial difficulty is not enough -- the debtor must show that the hardship is long-term or permanent.
Good faith effort. The debtor has made good faith efforts to repay the loans. This includes applying for income-driven repayment plans, deferment, or forbearance, and making whatever payments were feasible.

All three prongs must be satisfied. The Brunner test has been criticized as excessively rigid -- particularly the second prong, which effectively requires debtors to prove a negative about their future economic prospects. Courts applying Brunner strictly have denied discharge to debtors with chronic illness, disability, and decades of demonstrated inability to pay.

The DC Circuit Approach

The U.S. Court of Appeals for the DC Circuit has not issued a definitive published opinion adopting or rejecting the Brunner test. The U.S. Bankruptcy Court for the District of Columbia operates under the DC Circuit, and bankruptcy judges in DC have generally applied the Brunner framework in evaluating undue hardship claims, consistent with the approach used by the majority of circuits.

However, the DC Circuit's lack of binding precedent on the specific contours of the test means there is some room for argument. Debtors' attorneys in DC can advocate for a more flexible, totality-of-the-circumstances approach -- an alternative framework that some circuits and commentators have endorsed as more consistent with the statutory text.

The totality-of-the-circumstances test, adopted by the Eighth Circuit in Long v. Educational Credit Management Corp., 322 F.3d 549 (8th Cir. 2003), considers the debtor's past, present, and reasonably reliable future financial resources; the debtor's and dependents' reasonable living expenses; and any other relevant factors. It does not require the rigid prong-by-prong analysis of Brunner and allows the court to weigh all relevant circumstances holistically.

The Adversary Proceeding

Student loan discharge is not automatic. Even if you qualify, you must file an adversary proceeding -- a separate lawsuit within the bankruptcy case -- under Federal Rule of Bankruptcy Procedure 7001(6). The adversary proceeding names the student loan creditor as a defendant and seeks a determination that the debt is dischargeable under Section 523(a)(8).

The adversary proceeding involves:

Filing a complaint.
Service on the student loan creditor (the Department of Education, a loan servicer, or a private lender).
Discovery -- document requests, interrogatories, and potentially depositions.
A trial or, in some cases, summary judgment.
A judgment determining whether the loans are dischargeable in whole, in part, or not at all.

Partial discharge is possible. A court may determine that a portion of the student loan debt causes undue hardship while the remainder does not, discharging only the amount that the debtor truly cannot repay.

Recent DOJ Guidance and Updated Approach

In November 2022, the Department of Justice announced a revised process for evaluating student loan discharge claims in bankruptcy. Under the updated guidance, the DOJ directs its attorneys (who represent the federal government in student loan adversary proceedings) to apply a more structured, fact-based analysis rather than reflexively opposing discharge.

The DOJ's updated attestation process considers:

Present ability to pay. The debtor's income, expenses, and the gap between them.
Future ability to pay. Whether the debtor's financial circumstances are likely to change, considering age, education, work history, health, and dependents.
Good faith. Whether the debtor has engaged with the loan servicer, applied for income-driven repayment, and made payments when able.

Where the analysis supports discharge, DOJ attorneys are instructed to recommend that the government consent to discharge rather than litigate. This is a significant shift. Before this guidance, the Department of Education and its contractors opposed virtually every student loan discharge request, regardless of the debtor's circumstances.

The updated approach does not change the legal standard -- Brunner (or whatever test the court applies) still governs. But it changes the practical dynamics. Cases that would previously have gone to trial may now be resolved by consent, reducing the cost and duration of the adversary proceeding.

Private vs. Federal Student Loans

Federal and private student loans are both covered by Section 523(a)(8), but they differ in important ways:

Income-driven repayment (IDR) is available only for federal student loans. Plans like Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving on a Valuable Education (SAVE, though subject to ongoing litigation) cap monthly payments at a percentage of discretionary income and forgive any remaining balance after 20-25 years.
Private student loans offer no IDR option. The lender sets the repayment terms. If you cannot make the payments, the lender can sue, obtain a judgment, and garnish wages under DC's garnishment rules (subject to DC Code Section 16-572 wage exemptions).
DOJ guidance applies only to federal loans. The updated approach does not affect private lenders, who make their own litigation decisions.

For borrowers whose primary burden is federal student loans, income-driven repayment may be a more practical path than adversary proceeding litigation -- particularly if the monthly payment under IDR would be $0 or nominal.

Discharge of Related Debts

While the student loan principal itself is difficult to discharge, related obligations may be treated differently:

Accrued interest. Interest that has been capitalized into the loan balance is generally treated as part of the student loan and subject to the same undue hardship standard.
Collection costs and fees. The Department of Education and private lenders often add collection costs (up to 25% of the balance for defaulted federal loans). Whether these costs are part of the "educational benefit" covered by Section 523(a)(8) or separately dischargeable general unsecured debt is an open question in some jurisdictions.
Tuition debt owed directly to the school. If you owe money directly to a college or university (not through a student loan) for unpaid tuition, that debt may not be a "loan" or "educational benefit" under Section 523(a)(8) and may be dischargeable as general unsecured debt.

Practical Considerations for DC Filers

Explore IDR first. If your federal student loans are not in an income-driven repayment plan, apply before filing bankruptcy. A $0 monthly payment under IDR achieves the practical effect of discharge without litigation, and enrollment in IDR demonstrates good faith under the Brunner test if you later pursue adversary proceedings.
Document everything. The adversary proceeding is evidence-intensive. Medical records, employment history, income documentation, and correspondence with loan servicers all matter. Start preserving records well before filing.
Assess litigation costs. An adversary proceeding adds time and cost to a bankruptcy case. Attorney fees for student loan discharge litigation vary, but the potential relief -- elimination of tens or hundreds of thousands of dollars in debt -- can justify the investment.
Consider partial discharge. Even if full discharge is uncertain, a court may discharge a portion of the debt. This can reduce the balance to a manageable level, particularly when combined with income-driven repayment on the remaining federal loans.

Student loan debt is not the permanent sentence it is often portrayed as. The standard for discharge is demanding, but it is not insurmountable -- and the trend in both the courts and the executive branch is toward greater access to relief.