Student Loans in Bankruptcy — The Brunner Test and 2022 DOJ Guidance

Section 523(a)(8) — The Statutory Frame

Section 523(a)(8) excepts from discharge most "educational" debt unless excepting the debt from discharge would impose an undue hardship on the debtor and the debtor's dependents. The exception reaches three sub-categories:

• Loans made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non-profit institution (523(a)(8)(A)(i));
• Obligations to repay funds received as an educational benefit, scholarship, or stipend (523(a)(8)(A)(ii)); and
• Any other "qualified education loan" within the meaning of Internal Revenue Code Section 221(d)(1) incurred by an individual debtor (523(a)(8)(B)).

The undue-hardship inquiry is the exclusive route to discharge under 523(a)(8). Unlike the actual-fraud categories of 523(a)(2), (4), and (6), where the creditor must file an adversary or the debt is discharged by default, student loans are nondischargeable unless the debtor affirmatively files an adversary proceeding and proves undue hardship by a preponderance of the evidence.

The Brunner Test — The Majority Standard

The Second Circuit articulated the test that now dominates undue-hardship analysis in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). The Brunner test has three independent prongs, each of which the debtor must satisfy:

Prong 1 — Minimal Standard of Living

The debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for the debtor and the debtor's dependents if forced to repay the loans. Courts apply this prong by reviewing Schedules I and J, often comparing the household budget against IRS Local Standards or comparable benchmarks. The prong is not satisfied by mere financial strain; the debtor must show that repayment would force the household below a baseline of necessities.

Prong 2 — Additional Circumstances

Additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period. This prong is the most contested and the most variable across circuits. It typically requires evidence of a long-term limitation on earning capacity: a chronic medical condition, a permanent disability, advanced age, family-care obligations, or labor-market barriers that are not reasonably likely to resolve within the repayment horizon.

Prong 3 — Good-Faith Repayment Efforts

The debtor has made good-faith efforts to repay the loans. Courts evaluate the debtor's payment history, use of forbearance, deferment, consolidation, income-driven repayment plans, and other administrative options before bankruptcy. The third prong does not require perfect compliance; it requires conduct consistent with an honest attempt to repay within the debtor's means.

Failure on any single prong is fatal. The Brunner test has been criticized as creating a near-insurmountable barrier; the underlying statutory standard is "undue hardship," and circuits applying Brunner have at times read the three prongs more strictly than the text requires.

The Totality of Circumstances Split

Two federal circuits reject Brunner outright in favor of the Totality of Circumstances standard, originally articulated by the Eighth Circuit in In re Long, 322 F.3d 549 (8th Cir. 2003). Under the Totality test, the court examines the debtor's past, present, and reasonably reliable future financial resources; the debtor's reasonable necessary living expenses; and any other relevant facts and circumstances. The First Circuit adopted a similar approach in In re Lamento, 520 B.R. 667 (Bankr. N.D. Ohio 2014) and other cases tracking the Eighth Circuit's framework.

The doctrinal difference between Brunner and Totality is more rigid in description than in practice: many courts applying Totality reach Brunner-like outcomes, and many courts applying Brunner soften the analysis in cases of obvious hardship. The Department of Education's 2022 guidance, discussed below, was designed in part to reduce the practical gap between the two tests by changing federal litigation posture rather than statutory text.

The November 2022 DOJ and Department of Education Guidance

On November 17, 2022, the Department of Justice (Civil Division) and the Department of Education jointly issued new guidance titled "Guidance for Department of Education Federal Student Loan Bankruptcy Cases." The guidance fundamentally changed how the federal government litigates undue-hardship adversaries involving federal student loans.

The Three Operational Components

• An attestation form. Debtors complete a standardized attestation that gathers information on present financial condition, future financial prospects, and prior repayment efforts. The form replaces ad hoc discovery for federally held loans.
• An objective assessment. DOJ attorneys evaluate the attestation against defined metrics. Where the metrics indicate undue hardship, the government recommends settlement (typically a stipulated judgment of discharge) rather than contested litigation.
• An explicit endorsement of consent to discharge. The guidance directs DOJ attorneys to recommend consenting to a finding of undue hardship in qualifying cases, removing the historical default of contesting every adversary regardless of the underlying facts.

Doctrinal Status

The 2022 guidance does not change the statutory text of Section 523(a)(8) or the case law of Brunner and Totality. It changes the government's litigation behavior in federally held loan cases, which constitute the bulk of student-loan adversaries. Private-loan creditors and federally insured but non-federally-held loans are not covered by the guidance and continue to litigate under the existing Brunner/Totality framework in the applicable circuit.

Procedural Requirements for the Adversary

An undue-hardship action is commenced by adversary complaint filed in the bankruptcy court under Federal Rule of Bankruptcy Procedure 7001(6). The complaint must name the loan holder (servicers are not the correct party for federal loans; the Department of Education is). Discovery follows Part VII of the Federal Rules of Bankruptcy Procedure, which incorporate most of the Federal Rules of Civil Procedure with bankruptcy-specific modifications. The action is core to the bankruptcy proceeding under 28 U.S.C. Section 157(b)(2)(I).

Partial discharge is available in most circuits: a court that finds undue hardship as to a portion of the debt may discharge that portion and leave the balance intact. Some courts will also restructure dischargeability based on income-driven-repayment scenarios, although the doctrinal support for hypothetical-IDR analysis varies.

Related Provisions and Further Reading

• Section 523 — Exceptions to Discharge
• Deep dive: Denial vs. Nondischargeability
• Dischargeability Determination Procedure
• Deep dive: The Section 524 Discharge Injunction
• Student Loans in Bankruptcy — Overview