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 .
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.