In 2006, the average graduating undergraduate owed $19,000, but it was not uncommon for many graduates to have debt exceeding $40,000.  The original 1978 Bankruptcy Code provided that student loans could be discharged either if five years had passed from the time payment was first due or if the debtor provided for repayment during a 3-to-5 year Chapter 13 plan.  The rationale was that while students might not be able to repay their loans immediately after graduation, they would likely be able to do so in a few years.

Under the recent variation of the Bankruptcy Code, student loan debt is permanently nondischargeable.  11 U.S.C. 523(a)(8).  Even the post-petition interest on student loans are nondischargeable.  Bruning, 376 U.S. 358 (1964); Pardee, 193 F.3d 1083 (9th Cir. 1999).  It doesn't matter if the debtor files under Chapter 7 or Chapter 13.  The only exception is to persuade the Bankruptcy Court that the debtor satisfies the Brunner test for "undue hardship."  Many have characterized the "undue hardship" test itself as an "undue hardship."  Briefly, the debtor must prove that “(1) that she cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment portion of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.” See Pena, 155 F.3d 1108 (9th Cir. 1998) (adopted the Brunner test in the 9th Cir.); In re Saxman, 325 F.3d 1168, 1172 (9th Cir. 2003).

Further, the debtor pretty much had to try to prove this difficult test without the benefit of an attorney since (1) if the debtor filed Chapter 7, the debtor probably couldn't afford an up-front payment for undue hardship litigation and (2) if the debtor filed Chapter 13, the debtor would be forced to commit all their disposable income to a Chapter 13 plan.

However, the Ninth Circuit case law has broadened the options for debtors with truly burdensome student loans.  First, the Ninth Circuit Bankruptcy Appellate Panel recognized a partial discharge of student loans.  In particular, so long as debtors have shown that their future income and expenses will not permit them to pay their entire student loan debt without undue hardship then the finding that a debtor's earning capacity will improve in the future will not bar a partial discharge.  Carnduff, (9th Cir. BAP 2007).

Recently, the Ninth Circuit held in In the matter of Cathy Coleman (9th Cir. 2009) that it is acceptable to (1) pay a debtor's attorney for undue hardship litigation through a Chapter 13 plan and (2) litigate the issue of dischargeability of a student loan at the beginning of a Chapter 13 plan (even though the actual discharge doesn't occur until the end of the plan).  In brief, a student loan debtor with a true hardship situation does not have to endure committing five years of their disposable income to a Chapter 13 plan just to find out that they don't qualify for an undue hardship discharge.  A prudent lawyer could now include the cost of the undue hardship litigation in the Chapter 13 plan and obtain an early decision on whether student loan debt was dischargeable.  The Ninth Circuit suggested in dicta that if the debtor won, it may be possible to convert to Chapter 7 (if the debtor qualifies for such relief) and obtain an immediate discharge.  On the other hand, the Ninth Circuit suggested in dicta that if debtor lost, the Chapter 13 plan could be crafted to make greater payments to the nondischargeable student loan debt.