United States: Student Loan Discharge Upheld Under Clear-Error Standard

Last Updated: June 18 2013
Article by Francis J. Lawall and Lesley Welwarth

For many graduates, the weight of student loan debt can be overwhelming, particularly in a weak job market. However, for at least one, that burden has been reduced just a bit by virtue of a bankruptcy discharge. In a recent decision, the U.S. Court of Appeals for the Ninth Circuit reversed an Oregon district court judgment in Hedlund v. Educational Resources Institute, No. 12-35258, D.C. No. 6:11- cv-6281-AA, finding that court's de novo review of a Section 523(a)(8) proceeding to be improper and holding that the bankruptcy court's good-faith finding should be reviewed solely for clear error. In its opinion, the Ninth Circuit held that the bankruptcy court's review of the evidence, and its finding that the student loan debtor had made good-faith efforts to repay his loans, was not clearly erroneous.

Michael Hedlund's story is one that is playing out repeatedly across the country. He is a law school graduate, married and the father of one child, living and working in Klamath County, Ore. Like most law school students, Hedlund financed his law school education with Stafford loans, which in 1999, shortly after graduation, went into repayment. At that time, his outstanding balance was over $85,000, and his monthly payments totaled over $800. Unfortunately, Hedlund never successfully passed the Oregon bar exam, but did maintain a full-time job as a juvenile counselor. Despite Hedlund's efforts to consolidate his loans and negotiate a more feasible payment schedule, he was unable to make headway, resulting in the two companies servicing his loans taking judgments against him and commencing garnishment of his wages.

As a result, in 2003, Hedlund filed a Chapter 7 bankruptcy petition. He also commenced an adversary proceeding against the loan servicers, seeking a partial discharge under Section 523(a)(8) of the Bankruptcy Code. While most student loan debt is presumptively non-dischargeable under Section 727, Section 523(a)(8) provides an exception, wherein student loan debt may be dischargeable when such debt "would impose an undue hardship on the debtor and the debtor's dependents." The bankruptcy court partially discharged Hedlund's debt (all but $30,000).

However, the Ninth Circuit's Bankruptcy Appellate Panel (BAP), following a direct appeal by one of the loan servicers, reversed the lower court's decision and noted in Hedlund v. Pa. Higher Education Assistance Agency (In re Hedlund), 368 Fed. Appx. 819, 821 (9th Cir. 2010), that "it would not be unconscionable for Hedlund to eliminate a number of claimed expenses, including a new car payment." As a result, Hedlund's debt was reinstated in full.

Hedlund then appealed the BAP decision to the Ninth Circuit. The circuit court found that the bankruptcy court failed to sufficiently consider all of the available evidence, including the question of whether Hedlund could reduce his expenses to meet a greater portion of loan expenses, or whether he could increase income either by he or his wife taking on a part-time job. As a result, the Ninth Circuit vacated and remanded, instructing the bankruptcy court to apply the three-factor "undue hardship" test as set forth in Brunner v. New York State Higher Education Services, 831 F.2d 395 (2d Cir. 1987).

On remand, the bankruptcy court applied the Brunner test, under which a court must determine whether "(1) the debtor 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 had made good-faith efforts to repay the loans." In doing so, the bankruptcy court determined that Hedlund had sufficiently maximized his income, based, in part, on the fact that there was no evidence to suggest that he could earn a higher salary as a licensed attorney. Despite his failure to fully minimize expenses, Hedlund's budget did not tip the balance away from a good-faith finding. Moreover, the bankruptcy court determined that he satisfied his burden of showing good faith through his efforts to negotiate a repayment plan and his payment history.

On appeal, the district court reviewed the good-faith finding, de novo. Contrary to the bankruptcy court's findings, it found that Hedlund failed to make sufficient efforts to obtain employment, his attempts to reduce expenses were "immoderate," and that his lack of effort in negotiating a repayment plan was "even more vexatious."

Hedlund's subsequent appeal to the Ninth Circuit related to the bankruptcy court's finding of good faith and the standard of review applied by the district court to such good-faith finding. In the Ninth Circuit, "good faith is measured by the debtor's efforts to obtain employment, maximize income and minimize expenses." Although the bankruptcy court and the district court reviewed the same evidence and came to differing conclusions with respect to Hedlund's good-faith efforts to repay his loans, the Ninth Circuit found that "even though some might disagree with the bankruptcy court's good-faith finding, it was not clearly erroneous. The court relied on substantial evidence in the record, and its factual inferences were permissible."

The Ninth Circuit now makes it clear that district courts are to apply a deferential clear-error standard when reviewing the factual findings underlying a bankruptcy court's good-faith finding. The court also emphasized, however, that a clear-error standard of review does not preclude an appellate court from finding error as a matter of law: "Although good faith is primarily a question of fact reviewed for clear error, it can encompass questions of law that must be reviewed de novo."

The Ninth Circuit's decision may provide bankruptcy courts with a little more latitude in considering a Section 523(a)(8) request for discharge by graduates saddled with debt that imposes an "undue burden." Provided the bankruptcy court correctly applies the Brunner test to the facts presented, the district court will only be able to reverse such discharge upon a finding of clear error.

Originally published in The Legal Intelligencer

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Lesley Welwarth
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions