10 Student Debt 10 Student Debt
10.1. Luke Herrine, The Law and Political Economy of a Student Debt Jubilee
Read pp. 288-306 (the section on the history of student debt)
10.2 American Bankruptcy Institute summary of "undue hardship" test 10.2 American Bankruptcy Institute summary of "undue hardship" test
Section 523(a)(8) exempts education loan debt from discharge unless the debtor establishes that paying the debt would result in “undue hardship” on the debtor and the debtor's dependants. The term “undue hardship” is not defined in the Code, and bankruptcy courts have devised different tests to determine whether a debtor's circumstances constitute undue hardship.
(i) The Brunner Three-Part Test
The majority of courts have adopted the “Brunner test” to determine undue hardship. The test is from the Second Circuit case of Brunner v. New York State Higher Educ. Servs. Corp. Brunner set forth a three-part test under which the debtor must prove:
(1) That the debtor 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 period of the student loans; and (3) that the debtor had made good faith efforts to repay the loan.
The Brunner prongs are conjunctive, so that judgment must be entered against the debtor if he fails any one of the three requirements, even if any of the others are satisfied. [FN3] Most jurisdictions have adopted the Brunner test, including the Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits.
Brunner first prong:
The first prong of Brunner is that the debtor must prove that with his current income and expenses, he cannot maintain a “minimal standard of living” if forced to repay student loans. One factor in this determination is whether the debtor is maximizing his income and minimizing expenses. As part of maximizing income, the debtor must look for a job in any field, not just the one for which the debtor trained or prefers. In considering whether the debtor has minimized expenses, courts look to whether the debtor is in “self imposed hardship” due to unnecessary expenses - i.e., the extent to which the debtor's inability to pay creditors is caused by the debtor's own spending on extraneous expenses. Luxury spending or unreasonable amounts spent on otherwise reasonable expenses (including food) may show that the debtor is able to maintain a minimal standard of living even with loan payments. The relevant date for determining the minimal-standard-of-living element is the date of trial.
The Bankruptcy Code does not define what constitutes a “minimal standard of living.” An oft-cited opinion, In re Ivory, defines it as follows: (1) shelter (including heating and cooling); (2) basic utilities such as electricity, water, natural gas, and telephones; (3) food and personal hygiene products; (4) vehicles, along with insurance, gas, licenses, and maintenance; (5) health insurance or money to pay for healthcare; (6) some amount of entertainment or diversion, even if only a television or a pet. While the Ivory list is often referenced by other courts, it need not be applied mechanically:
Rather, in appropriate circumstances, the court must be prepared to depart from the list based on its own experiences, common sense, knowledge of the surrounding area and culture, and assessment of the reasonableness of what debtor claims he or she needs. In addition, what is minimal can and probably should change over time, e.g., with new technology driving down the cost of things that might have previously been cost prohibitive.
Although “minimal standard of living” is not supposed to mean that the debtor live in poverty, “it does mean that the debtor is expected to do some financial belt-tightening and forgo amenities to which he may have become accustomed.” But standards can change with time. In recent years, courts have found that standard expenses for cell phones, cable and internet are basic and reasonable expenses.
Brunner second prong
To meet the second prong of Brunner, the debtor most present “additional circumstances” that show the state of affairs is likely to persist for a significant portion of the repayment period. In essence, the debtor must demonstrate that “circumstances indicate a certainty of hopelessness, not merely a present inability to fulfill financial commitment.” This has been described as “the heart of the Brunner test... and is difficult to prove because it requires the debtor to show that she will be unable to repay her student loan debt in the future for reasons outside her control.”
The debtor may try to show a variety of causes, such as illness, disability, lack of job skills, or a large number of dependants. The most common type of additional circumstance supporting undue hardship discharge appears to be medical-related issues, such as chronic mental or physical ailments that interfere with the debtor's ability to work and generate income. Depression caused by debt, without more, generally does not suffice. Ultimately, however, “the most important factor in satisfying the second prong is that the additional circumstances must be beyond the debtor's control, not borne by free choice.” A debtor who left a well-paying nursing career at age 45 to enter chiropractic school could not complain that, at age 54, the profession did not provide enough income for her to repay her student loan debts within her lifetime. In another case, a debtor, an adjunct professor, refused to apply for permanent work at other schools because she deemed them too far from her home, even though the increased income would more than offset extra transportation costs.
But not all choices are necessarily free choice. Where a debtor discontinued her studies twenty-five years previous in order to care for her infirm parents, the court characterized her decision as a moral choice, not a choice to be poor. In another case, a debtor incurred $200,000 of student loan debt for undergraduate and medical school, but by the time of her bankruptcy petition, had became a full-time stay at home mother with five young children, including two special needs children. The debtor met the second prong of Brunner. As the court stated, “[t]his is not a case in which a debtor willfully chose to avoid payments that could have been made or was underemployed or unemployed for no discernible reason. Caring for her five young children has become Walker's full-time occupation.”
The distinguishing element in these cases is whether the debtor has options that could increase income or decrease expenses. Changing patterns of income to care for elderly parents or raise children were found to not constitute free choice, whereas personal career changes or preferences were. In addition, the time frame of the choice, i.e., a recent choice of the debtor or one in the distant past, can also be a consideration.
Less frequently, the Brunner second prong can also be met where a debtor has been unable to find employment despite sustained and diligent efforts. The standard is strict. In one case, a pro se debtor had trained a paralegal, but for ten years had sought unsuccessfully to land any type of a job. The court, having the observed at trial the debtor's demeanor, body language and overall attitude, could not help but be moved: “[s]he has clearly been worn down by the difficulties she has experienced, and it shows.” The court then noted the exceptional circumstances in which a debtor's history of failure to secure employment might justify a finding that the second prong of Brunner was met:
Rarely has the Court seen the kind of persistent search efforts in which the debtor has engaged over the past decade. Never had the court seen such utter futility be the result of a debtor's job search efforts. This debtor is truly destitute and has been in these straits for many years without respite. ***If the term “certainty of hopelessness” is to ever have any application, it is in this case.
It is unclear the extent to which a debtor's advanced age may constitute an “additional circumstance” to satisfy the second prong of Brunner. In Brunner, the court held that no additional circumstances exist where the debtor “is not disabled nor elderly.” One court cited the debtor's age (early fifties) as limiting her earning capacity and thus her ability to afford loan repayment. However, other courts have held that people who take on education debt at an older age do not suffer undue hardship because they owe debt into their retirement age, even if the debtor asserts he will be unable to pay the loan in their lifetime.
Brunner third prong
The third prong of Brunner is whether the debtor has made good faith efforts to repay the loan. As a starting point, failure by the debtor to make a payment does not of itself establish a lack of good faith. Rather, a debtor's good faith is measured by his “efforts to obtain employment, maximize income, and minimize expenses.” So, where a debtor attempted unsuccessfully find work while living with his mother, and at the same time suffered from debilitating medical conditions, the third prong of Brunner was satisfied. On the other hand, a debtor's failure to make any payments when earning an income can be evidence of lack of good faith efforts.
Some courts consider whether the debtor has participated in alternative repayment options. Creditors may argue that this means the debtor must have negotiated a repayment plan under the Income Contingent Repayment Program. However, in In re Mosley, the Eleventh Circuit rejected a per se test. In that case, although the debtor's payment under an income contingent repayment plan would be zero, interest on the debt would continue to accrue and the amount forgiven at the end of 25 years could be treated as taxable income. As the court pointed out, this is not always a viable option for debtors because it would require them to “‘trade one dischargeable debt for another.”’
The Sixth Circuit has also refused to hold that the good faith prong of Brunner requires the debtor to participate income contingent repayment, noting that, inter alia, such a rule would in effect eliminate the discharge of student loans for undue hardship from the Bankruptcy Code. The majority of courts agree.
(ii) Totality of the Circumstances Test
The Eighth Circuit uses a “totality of the circumstances test” under which the court considers “(1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependant's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.” Thus, the court found undue hardship where the debtor cared for five children, including two autistic children, and her spouse's income as a police officer was insufficient to meet their reasonable expenses, much less pay anything towards her $300,000 student loan debt.
The First Circuit has not adopted a specific test, but instead focuses on the debtor's ability to earn an income in the future: “We see no need in this case to pronounce our views of a preferred method of identifying a case of ‘undue hardship.’ The standards urged on us by the parties both require the debtor to demonstrate that her disability will prevent her from working for the foreseeable future.”
In absence of specific instructions from the First Circuit Court of Appeals, the First Circuit BAP and bankruptcy courts in Massachusetts employ a “totality of the circumstances test.” Courts adopting this approach find that the second and third prongs Brunner go beyond what is required under §523(a)(8). In Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon) [FN52] the First Circuit BAP rejected the second prong of Brunner, which requires a showing that the debtor's state of affairs is likely to persist for a significant portion of the repayment period:
Many courts interpreting and applying the second Brunner prong, however, place dispositive weight on the debtor's ability to demonstrate “additional extraordinary circumstances” that establish a “certainty of hopelessness.” The has led some courts to require that the debtor show the existence of “unique” or “extraordinary” circumstances, such as the debtor's advanced age, illness or disability, psychiatric problems lack of usable job skills, large number of dependents or severely limited education.... And, in the absence of such a showing, the court may conclude that the debtor has failed the second Brunner prong and the student loans will not be discharged. Requiring the debtor to present additional evidence of a “unique” or “extraordinary” circumstances amounting to a “certainty of hopelessness” is not supported by the text of §523(a)(8). The debtor need only demonstrate “undue hardship.”
The BAP also took issue with the third prong of Brunner, which requires the debtor to affirmatively prove good faith in attempting to repay the loan:
Ultimately, the debtor must establish by a preponderance of the evidence that her present and future actual circumstances would impose an undue hardship if her debts are excepted from discharge. * * * The party opposing the discharge of a student loan has the burden of presenting evidence of any disqualifying factor, such as bad faith. The debtor is not required under the statute to establish prepetition good faith in absence of a challenge. The debtor should not be obligated to prove a negative, that is, that he did not act in bad faith, and, consequently, in good faith.
The Bronsdon court found that debtor's efforts to repay a loan is just one of the elements in the totality of the circumstances test, and not a dispositive requirement on its own. For example, income contingent or IBR programs allow for suspension or reduction of payments, but can result in the continued accrual of interest. Such “negative amortization” in fact increases the debtor's ultimate debt burden. In addition, federal loan forgiveness effectively trades nondischargeable loan debt for nondischargeable tax debt. Accordingly, many loan repayment programs may not be suitable for debtors, and should not be taken into consideration when determining whether the debtor should be allowed a discharge.
(iii) Partial Discharge of Education Debt
Some courts permit a debtor to discharge part of an education debt using Brunner or the “totality of the circumstances” criteria. Whether this is allowed under the Code is unclear. On its face, §523(a)(8) refers to discharge of “an educational benefit overpayment or loan....” This can be construed to mean discharge of a loan in its entirety, and not a discharge of a part of a loan. Other provisions of the Code expressly provide for adjustment of a portion of a debt. For example, §506(a)(1) allows for partial modification (bifurcation) of a secured debt into secured and unsecured components “to the extent of the value of such creditor's interest in [the collateral].” In consumer cases, the debtor may avoid a judgment lien against property of the debtor “to the extent that such lien impairs an exemption to which the debtor would have been entitled....” In these provisions, the words “to the extent” show that partial treatment of the claim is allowed. There is no such language with respect to treatment of education debt.
In absence of express language allowing for partial discharge of education debt, some courts grant partial discharge pursuant to §105(a), which allows the court to “[i]ssue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” Thus, courts have granted partial discharge of student loan debt by discharging part of the principal, accrued interest or attorney's fees, instituting a repayment schedule, deferring repayment, or even by allowing a debtor to reopen bankruptcy proceedings to revisit the question of undue hardship.
The Sixth Circuit has held that partial discharge is permitted under §105(a) using the three-part Brunner criteria. To receive the discharge, the debtor must satisfy each prong of the Brunner test with respect to the portion of the debt to be discharged, and the discharge is allocated pro rata among the debtor's loans. In one case, a bankruptcy court applied the three-part Brunner test in discharging all but $8,045.02 of the debtor's total student loan debt of $36,284.81. “The debtor's inability to repay the student loans must result from factors beyond the debtor's reasonable control....” The court found that the most important element causing the debtor's financial problem was her cancer, and that because of this, “it is highly likely that [debtor's] financial predicament will persist for many years, and possibly the rest of her life.”
Courts in the Tenth Circuit, Eleventh Circuit, and lower courts in the Ninth Circuit also grant partial discharge of student loans using the Brunner criteria. Other courts have ordered partial discharge under the “totality of the circumstances” test. For example, a Massachusetts bankruptcy court held that although the debtor had not proven undue hardship at trial, her long-term income prospects were dubious given her advanced age and history of poor health. Therefore, the court held that if the debtor participated in the Ford Program and abided by the income-based option, the court would discharge whatever portion of the debt remained at the expiration of the repayment program.
A hybrid approach was taken by the court in In re Hinkle. In that case, the court ruled that there was no authority under the Code to a grant partial discharge of any education debt, but that where a debtor had multiple debts, the court could grant a full discharge to some of the debts while leaving the others nondischargeable, based upon the Brunner criteria. Thus, of the debtor's six student loans, the court found that the three loans that had been in repayment the longest time, totaling $18,143, were dischargeable, but that the debtor would be able to pay the three remaining loans totaling $10,014. Other courts use a similar loan-by-loan approach.
One problem with the loan-by-loan approach is that it requires a court to decide which loan(s) which will be paid and which ones discharged. There is nothing in the Bankruptcy Code that addresses this type of prioritization, and several courts have held that loan-by-loan discharge is inappropriate for this reason.
A number of courts have held that the Bankruptcy Code does not allow for partial discharge. These include the Third Circuit and many bankruptcy courts.
10.3. Persis Yu, Relief for Borrowers in Income-Driven Repayment
Read pp. 75-81
10.4. Michael Pierce & Rebecca Mauer, Relief for Public Service Workers
Read pp. 28-36