Student Loans: Two Appeals Court Cases Question the Brunner Test
Section 523(a)(8) of the bankruptcy code states that in a chapter 7 or chapter 13 case, the bankruptcy court will not discharge any student loan debt "unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. section 523(a)(8).
Undue hardship was interpreted in the influential case Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), as follows:
"Undue hardship" requires a three-part showing (1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for [himself] and [his] 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 for the student loans; and (3) that the debtor has made good faith efforts to repay the loans. Brunner, at 1135.
The two recently decided cases which question the Brunner test are Kreiger v. ECMC, No. 12-3592 (7th Cir. Apr. 10, 2013), and Roth v. ECMC, No. 11-1233 (9th Cir. BAP Apr. 16, 20123). In Kreiger, the appeals court stated that the Brunner test created a "judicial gloss" on the phrase "undue hardship" which could lead courts to allow Brunner to "supersede the statute itself." The court held that the debtor lived in a rural area with little prospect of future employment allowing payments on her student loans. The debtor should not have been required by a lower court to enroll in a futile 25 year income-based repayment plan, where her future efforts to repay would be counted toward a showing of good faith under the third prong of the Brunner test, according to the appeals court.
In Roth v. ECMC, another federal appeals court also questioned a lower court's requirement that the 64 year old debtor should have been willing to enroll in a 25 year repayment plan for her $95,000 in student loans. The appeals court noted that upon forgiveness of the student loan debt by ECMC after the 25 year period, the debtor would owe income tax on the entire $95,000 forgiven debt, except to the extent she was insolvent under the tax code, 26 U.S.C. section 108(a). The "potentially disastrous tax consequences" tipped the scales for the appeals court, which held that the debtor did indeed meet the Brunner test's good faith requirement.
Even more noteworthy in Roth was the concurring opinion filed by Judge Pappas of the Ninth Circuit Bankruptcy Appellate Panel. Judge Pappas noted that Brunner was decided in 1987, at a time when the bankruptcy code allowed discharge of student loan debts on either of two grounds: first, if the student loans had been in repayment status for five years or more on the date the bankruptcy was filed, or second, if repayment of the student loans would constitute an undue hardship on the debtor. The bankruptcy code has since been amended to remove the five year discharge rule.
Judge Pappas also observed that since 1987, the average balance owed on student loans has increased greatly. Brunner involved a $9,000 student loan, but today the average balance owed on student loans is $25,000, and twelve percent of borrowers now owe more than $50,000. "Astoundingly, today there is nearly $1 trillion in outstanding educational debt," said Judge Pappas, and much of it is "owed by borrowers who never had the ability to make substantial payment on the balances." The Brunner test was "truly a relic of times gone by." Judge Pappas called for the Ninth Circuit to formally reject Brunner, and return to a more common sense understanding of the phrase undue hardship.
Image used by permission from Occupy* Posters' Photostream, Flickr.
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