## Facts

- Michael Eric Hedlund financed a B.A. and J.D. with federal student loans later held by Pennsylvania Higher Education Assistance Agency (PHEAA) and The Educational Resources Institute, Inc. (TERI).
- After law school, Hedlund failed the Oregon bar exam twice (1997, 1998) and missed a later sitting; he lost a prosecutor’s office job after failing.
- Loan repayment began in 1999; Hedlund owed PHEAA more than $85,000, with monthly payments exceeding $800 while he earned about $10 per hour.
- Hedlund obtained hardship forbearances but ultimately defaulted.
- He attempted repayment and negotiation, including a one-time $950 payment and an offer of a $5,000 lump sum for reduced monthly payments; PHEAA declined.
- PHEAA began garnishing wages (about $250/month) in 2002; TERI later garnished $1,100 from Hedlund’s bank account.
- Hedlund filed Chapter 7 bankruptcy and sought discharge of his student loans for “undue hardship” under 11 U.S.C. § 523(a)(8).
- Before trial, Hedlund settled with TERI for $50 per month; the dispute proceeded primarily as to PHEAA.

## Issues

1. Whether a bankruptcy court’s finding of “good faith” under the third prong of the Brunner undue-hardship test is reviewed on appeal for clear error or de novo.
2. Whether, applying the proper standard of review, the bankruptcy court clearly erred in finding good faith and granting a partial discharge of Hedlund’s student loan debt.

## Decision

- The Ninth Circuit held the district court used the wrong standard of review by reconsidering the bankruptcy court’s good-faith finding de novo.
- The court ruled that good faith under § 523(a)(8) is a factual determination reviewed only for clear error.
- Applying clear-error review, the Ninth Circuit concluded the bankruptcy court’s good-faith finding was not clearly erroneous.
- The court reaffirmed that partial discharge of student loans is permissible where only part of the debt meets the undue-hardship standard.
- The Ninth Circuit reversed and remanded with instructions to reinstate the bankruptcy court’s partial discharge, which left Hedlund responsible for $32,080 of the PHEAA debt and discharged the remainder.

## Legal Principles

- Under 11 U.S.C. § 523(a)(8), “undue hardship” is evaluated in the Ninth Circuit under the three-part Brunner test: (1) inability to maintain a minimal standard of living if forced to repay, (2) persistence of the inability, and (3) good-faith efforts to repay.
- A bankruptcy court’s Brunner “good faith” determination is a fact-intensive finding reviewed for clear error, not de novo.
- Good faith commonly considers the debtor’s efforts to obtain employment, maximize income, minimize expenses, and negotiate repayment.
- Failure to enroll in an income-contingent repayment plan is not per se evidence of lack of good faith; it is one factor among many.
- Partial discharge is available when full repayment would impose undue hardship but repayment of a portion is feasible.

## Conclusion

The Ninth Circuit required appellate courts to review Brunner good-faith findings for clear error and, on that basis, reinstated a bankruptcy court’s tailored partial discharge of student loan debt where the record supported the debtor’s sustained efforts to manage expenses, maintain employment, and pursue repayment options despite long-term inability to repay the full balance.


Hedlund v. Educ. Res. Inst., Inc., 718 F.3d 848 (9th Cir. 2013)