“Undue Hardship”: How It Got Into Student Loan Law. And Why it Makes No Sense .
According to Bankruptcy law today, Student Loans can only be discharged in cases of “Undue Hardship.” How did this term even get into student loan law? It sounds legalistic enough… But is it actually meaningful in any way?
The short answer is: No, it really isn’t!
This post is the sequel to my post about the changes that Congress made to bankruptcy law regarding student loans in 1998. That post explains in greater detail just why the law makes NO SENSE.
However, we should ask:
Where does the term “Undue Hardship” comes from?
That is what this post is about.
First, consider that a lot of material you will find online claim that there are “Legal Tests” that courts developed for assessing whether a former student’s finances qualified as “Undue Hardship.” Here is the problem: All of these tests were developed prior to 1998.
The so-called “Brunner Test” is cited most often. The test was developed in 1989.
But in 1998, “Undue Hardship” was moved to a totally different context in the law. In short, all of the “Legal Tests” were developed at a time when 5 years after their last loans, borrowers still had access to Bankruptcy without proving “Undue Hardship.”
How could any of these so-called Tests still apply when the time scale of the debt had totally changed?
Anyway, I address all that in my first post. So much for the “tests.”
Still, “Undue Hardship” was originally entered into Student Loan Bankruptcy Law in the 1970s. Did Congress just pull the term out of thin air? Where might this term have come from?
“Undue Hardship” does appear in the Bankruptcy Code in another place.
But there it serves a completely different function. It actually makes sense. Here is how it works:
Often, when in Bankrupcty, people want to hang on to some property in spite of the fact that they are going bankrupt like a house or a car. Sometimes, they still owe money on that house or that car. Hence, they have the opportunity to “Reaffirm” those debts that they want to keep paying.
In order to “Reaffirm” debts like a Mortgage or Car Loan that will allow them to hang on to their property (according to 524.J) they have to sign off on a statement that:
I believe this reaffirmation agreement will not impose an undue hardship on my dependents or me. … I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship on me and must be reviewed by the court.
So for reaffirming debts, “Undue Hardship” mainly means Ability to Pay. The statement that “I will not be in undue hardship,” mainly means, “I reasonably believe that I will be able to go on paying.” It also means, “This piece of property that I will be paying for is necessary.”
If this language were held consistent over the entire bankruptcy code, then regardless of the elimination of the time limit, most former students who have real difficulty resolving their tuition financing arrangements should be eligible to discharge their loans. Should they not?
Really, saying that I am declaring Bankruptcy and by the way, my student loans impose an undue hardship on me seems more than a little redundant.
Of course predicting/affirming that there will be “No Undue Hardship” is different from declaring that “I am in Undue Hardship right now.” But, in any case, we can see that disputes about “Undue Hardship” are obviously a long time coming.
This language in bankruptcy code has been a ticking time bomb for Tuition Financing companies since 1998. What have the Education Financing companies done? They came up with a workaround to protect their interests, of course!
Can Income-Based Repayment Be an “Undue Hardship”?
Amidst the anti-Wall Street fervor of the financial crisis after 2008, Student Loan servicers introduced Income-Based Repayments Plans.
How does that work? You basically agree to report back multiple times per year on the state of your finances to agencies like Navient and American Education Services. You have to keep up with a time-consuming and confusing schedule of updates — you can get into a payment plan that conforms to Navient’s judgment of “what you can afford.”
Then after you pay “only what you can afford” for a quarter of a century or 600 on-time payments, the remaining balance is supposed to be “Forgiven.”
No arrangement which by definition only demands “what one can afford” can be construed as an “Undue Hardship” by bankruptcy courts. Right? Problem solved?
One problem is that interest continues to add to the balances of Tuition Financing Agreements. If you do not pay enough to reduce the debt, instead paying only “what they can afford,” the balance explodes. And when your loans are “forgiven”, this “forgiven” amount is counted as income by the IRS. So the tax burden former students will owe years in the future is destined to be a very severe hardship in and of itself.
The fact is that there are no other examples in law where “Undue Hardship” is used to apply to financial obligations that extend to hundreds of times the net worth or yearly income of the person (or entity) involved.
“Undue Hardship” in Employment and Disability Law
Undue Hardship in Disability Law
Consider the way “Undue Hardship” is used in the Americans with disabilities act. (Incidentally, results about ADA fill most of the Google search results for the term.). The law which was passed in 1990
requires an employer(2) to provide reasonable accommodation to qualified individuals with disabilities who are employees or applicants for employment, unless to do so would cause undue hardship.
Think about the scale of this kind of “Undue Hardship” an employer does not have to go into debt to build a ramp or a computer system for disabled employees if that means going into debt for the next twenty five years of his company’s business.
Of course, a legal term appearing in two unrelated domains of law do not have to be equivalent. And yet for guidance on understanding this idiosyncrtic term, where else are we to look but in law.
The ADA explicitly differentiates its use of “Undue Hardship” from that used in the 1964 Civil Rights act which demands that employees make a reasonable accommodation of religious beliefs unless that imposes “more than a minimal burden on the operation of the business.”
In the case of the ADA,
“Undue hardship” means significant difficulty or expense and focuses on the resources and circumstances of the particular employer in relationship to the cost or difficulty of providing a specific accommodation. Undue hardship refers not only to financial difficulty, but to reasonable accommodations that are unduly extensive, substantial, or disruptive, or those that would fundamentally alter the nature or operation of the business.
One may ask, however, why did Congress not seek to define and differentiate “Undue Hardship” for the Bankruptcy Exception for Student Loans from other uses of Undue Hardship if it did so to differentiate ADA’s “Undue Hardship” from what was already found in the Civil Rights Act?
Most likely the presence of the Time Limit on the Student Loan Exception was the reason why congress saw no need to define “Undue Hardship” when they initially used the term.
“Well, these debts will be open to Bankruptcy discharge in a few years anyway. If there are exceptional cases, where someone can not just defer or forebear the debt until the limit on the exception has passed, then those will be dealt with by judges.”
But then once the term was in the law, it just took some Cut and Paste lawmaking to push the rules into a state of incoherence.
Holding Schools, Lenders, and the Department of Education Responsible
The main problem, from a legal perspective, rarely discussed is this: Since 1998, Tution Financing Arrangements were built up in an environment of misinformation about the precise nature of the rights of former students in the bankruptcy courts.
Schools, lenders, and the department of education are responsible for the widespread misperception among their customers that student loan bankruptcy was forbidden by law.
Walk around your nearest college campus and pick a hundred students at random and ask them what the term “Undue Hardship” means to them. 99 out of a hundred will not mention the bankruptcy code and student debt. Then ask if they are taking on loans to be there, and over 90% will say, “Yes.” Then ask them what they know about student loans and bankruptcy and they will say, “Student loans cannot be discharged in bankruptcy.”
This is because they have been essentially misinformed by their schools, their lenders, and the Department of Education.
