Student loans are not dischargeable in bankruptcy unless the debtor can show that excepting the debt from discharge "would impose an undue hardship on the debtor and the debtor's dependents." To determine whether the debtor would suffer an "undue hardship," courts in the Ninth Circuit use a three-part test that has proven to be extremely difficult for a debtor to meet.
[T]he debtor must prove that: (1) he cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if required to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans.Educ. Credit Mgmt. Corp. v. Mason (In re Mason), 464 F.3d 878, 882 (9th Cir. 2006). In order to be granted the hardship discharge, the debtor must prove all three parts of the test.
In Hedlund, the court focused its analysis on the "good faith efforts" portion of the test, since the other two elements were not in dispute. In that case, the debtor, Hedlund, had gone to law school and had incurred over $100,000 in student loan debt but failed to pass the bar exam in three tries and was therefore unable to maintain employment as an attorney. He did obtain full-time employment as a juvenile counselor with the county, but that job paid just $10 per hour and he was unable to find a higher-paying job despite several attempts. After his loans went into repayment he made one voluntary payment of about $950, and had about $250 per month garnished from his wages for about 18 months. He had attempted to negotiate a repayment plan, but was unable to come to an agreement with the creditor. Finally, 6 years after graduating from law school and over 4 years after the student loans had gone into repayment, Hedlund filed bankruptcy.
In its discussion of whether Hedlund had used good faith efforts to repay the loans, the court discussed two factors: (1) the debtor's efforts to obtain employment, maximize income, and minimize expenses and (2) the debtor's efforts to negotiate a payment plan.
The court viewed favorably the fact that Hedlund had maximized his employment and had made three attempts at passing the bar as well as the fact that Hedlund had waited four years before filing bankruptcy, during which time he was subject to wage garnishment. The court was not fully impressed by the debtor's efforts to negotiate a repayment plan and viewed some of the debtor's expenses (such as a new car lease and two cell phones) skeptically, but ultimately held that the bankruptcy court's finding of good faith was not clearly erroneous.
Hedlund does not change the three-part test that debtors must meet in order to receive a discharge of student loans, and the standard for receiving such a discharge remains very high. However, Hedlund does provide a useful comparison point for those who have student loan debt and are considering bankruptcy.