Sympathy for the Debtor? Not When It Comes to Student Loans
Discussions of student debt often include the blanket assumption that not even bankruptcy can relieve a borrower of his student loan obligations. While this assumption is incorrect, a debtor must provide compelling evidence that an undue hardship will result if the debtor is required to repay the loan.
November 14, 2019 at 12:30 PM
7 minute read
Student loans are in the news. Nearly everyone either has, or knows someone with, a student loan obligation, and growing numbers of borrowers are in some form of default or forbearance. Student loan forgiveness has even become an election issue. Discussions of student debt often include the blanket assumption that not even bankruptcy can relieve a borrower of his student loan obligations. While this assumption is incorrect, a debtor must provide compelling evidence that an undue hardship will result if the debtor is required to repay the loan, see 11 U.S.C. Section 523(a)(8).
The Bankruptcy Code does not define "undue hardship." However, in Brunner v. New York State Higher Education Services, 831 F.2d 395 (2d Cir. 1987), the U.S. Court of Appeals for the Second Circuit adopted a three-prong test for evaluating "undue hardship" claims. According to the Brunner test, in order to justify the discharge of student loan debt, a debtor must prove: an inability to maintain a minimal standard of living; the inability is likely to persist for a significant portion of the loan repayment period; and a good faith effort to repay the loan. The Brunner test has been strictly applied in a majority of circuits and has resulted in an exceptionally demanding standard that, in most circumstances, prevents discharge of a student loan obligation in bankruptcy without the consent of the student loan lender.
In In re Thomas, 931 F.3d 449 (5th Cir. Jul. 30 2019), the U.S. Court of Appeals for the Fifth Circuit considered whether the Brunner test should be strictly applied to a "sympathetic" debtor seeking a discharge of her student loan obligations. Looking to the language of the statute and citing Congressional intent, the court concluded that it must apply the Brunner test to sympathetic and unsympathetic debtors alike. The court further recognized that any relief from, or change to, the Brunner test must come from Congress and not the courts.
By the court's own admission, the debtor in In re Thomas was a sympathetic individual. She was over 60 years old. She suffered from a painful degenerative medical condition that limited her ability to stand for periods of time. As a result of that medical condition, she was unemployed. Unsurprisingly, the debtor's lack of employment caused her to be unable to make payment on her significant debtors, including $7,000 in student loans owed to the federal Department of Education. Consequently, in 2017, the debtor sought relief under Chapter 7 of the Bankruptcy Code.
The debtor received a general discharge of her debts pursuant to Section 727 of the Bankruptcy Code. However, Section 523(a)(8) of the Bankruptcy Code prevented the general discharge from applying to her student loan debt. Therefore, the debtor initiated an adversary proceeding against the Department of Education (as the lender of the student loan) seeking a discharge of her student debt as well.
In order to succeed at trial, the debtor needed to meet each of the three prongs of the Brunner test. As to the first prong, the bankruptcy court determined that the debtor had established an inability to maintain a minimal standard of living because her monthly expenses exceeded her monthly income by almost $450. As to the second prong, however, the bankruptcy court found that the debtor failed to show that her hardship circumstance would persist since she could not show that she was completely ineligible for employment. To the contrary, the debtor admitted that she could work in a sedentary role. Because the Brunner test requires a debtor to meet every prong, the bankruptcy court did not reach a conclusion as to whether the debtor made a good faith effort to repay the loan.
The debtor appealed the bankruptcy court's decision denying her a discharge of her student loan obligation. The district court affirmed the decision. Notably, in both the bankruptcy court and district court decisions, the courts indicated sympathy for the debtor, as well as their discomfort with the demanding nature of the Brunner test. Still, those courts found that the debtor was not entitled to a discharge of her student loan debts.
The debtor appealed further to the Fifth Circuit. Again, the court expressed sympathy for the debtor, but ultimately concluded that the debtor had failed to meet the exacting demands of the Brunner test. Specifically, the court focused on whether the debtor's present inability to pay her student loans and maintain a minimal standard of living would persist throughout a significant portion of the loan repayment period. Based on the record before it, the court answered this question in the negative. The court was particularly struck by the debtor's own admission that she was capable of employment in sedentary work environments. Taken together with the debtor's actual history of employment, the court determined that there was no evidence that the debtor's "present circumstances, difficult as they are, are likely to persist throughout a significant portion of the loans' repayment term."
Interestingly, after deciding the dischargeability issue, the appellate court's opinion goes on to address the several policy-based critiques of Brunner and its progeny that the debtor and her amici raised in their briefs, including the argument that Brunner should only be applied to "unsympathetic" student loan default debtors. The court was unconvinced by this argument in light of the plain text and intent of Bankruptcy Code Section 523(a)(8). The court recognized that the section "as it stands today excepts virtually all student loans from discharge unless requiring repayment would impose an undue hardship on the debtor and the debtor's dependents." The court further noted that "Congress' series of amendments [to the Bankruptcy Code] clearly evinces an intent to limit bankruptcy's use as a means of offloading student debt except in the most compelling circumstance." Indeed, the court concluded that "the plain meaning of the words chosen by Congress is that student loans are not to be discharged unless requiring repayment would impose intolerable difficulties on the debtor."
The court's decision might appear harsh to some, and the court of appeals recognized that the consequence of the Brunner test "is that sympathetic debtors [like the debtor in Thomas] are held to the same standard as debtors who are less sympathetic." This outcome, after all, is consistent with the text of Section 523(a)(8), which draws no distinction between debtors who paint a more sympathetic picture to the court and those who might be viewed as "gamers" of the system. As a result, the court rightly recognized that issues surrounding the requisite factors of dischargeability of student debt are within the purview of Congress, and not our bankruptcy courts. In the meantime, borrowers, debtors, lenders and counsel alike should be reminded of the uniformly high bar that must be met in order to show that repayment of student loan debt will cause such an "undue hardship" on the debtor that discharge of that obligation is allowable under the statute.
Rudolph J. Di Massa Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights.
Jarret P. Hitchings, an associate with the firm, practices in the area of commercial finance, financial restructuring and business bankruptcy.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllFederal Judge Allows Elderly Woman's Consumer Protection Suit to Proceed Against Citizens Bank
5 minute readJudge Leaves Statute of Limitations Question in Injury Crash Suit for a Jury
4 minute readSupreme Court's Ruling in 'Students for Fair Admissions' and Its Impact on DEI Initiatives in the Workplace
6 minute readLaw Firms Mentioned
Trending Stories
- 1US Supreme Court Tries to Define a 'Crime of Violence'
- 2How I Made Practice Group Chair: 'Think About Why You Want the Role, Because It Is Not an Easy Job,' Says Aaron Rubin of Morrison Foerster
- 3People in the News—Nov. 22, 2024—Marshall Dennehey, Buchanan Ingersoll
- 4$83M Verdict After $100K Demand Rejected in Henry County
- 5Samsung Flooded With Galaxy Product Patent Lawsuits in Texas Federal Court
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250