NCLC and NACBA filed a joint amicus brief in the First Circuit Court of Appeals seeking to lessen the burden on debtors trying to discharge student loans based on undue hardship. Murphy v. U.S. Dept. of Educ., No. 14-1691 (filed July 29, 2015).
Most courts addressing student loan discharge under section 523(a)(8) apply some version of the undue hardship test established by the Second Circuit in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). At the time Brunner was decided, “student loans were automatically dischargeable in bankruptcy, without proving undue hardship, if debtors simply waited five years after their loans first became due.” Because of the ease of discharge, there was concern that debtors would prematurely seek to discharge student loans without demonstrating a sustained period of inability to pay. As a result, Brunner added a “good faith” element to discharge under section 523(a)(8).
Since Brunner, the pendulum has swung in the other direction. “The nature of student loan debt, the structure of student loan programs, and the Bankruptcy Code itself have all changed significantly since the undue hardship test adopted by nine circuit courts of appeal was first developed by the Second Circuit in Brunner.” Many of the circumstances underpinning the stringent Brunner test no longer exist. The feared abuse by debtors is rare and the financial hardship created by today’s higher education costs and loan terms has intensified the burden on debtors. Also, in 2005, BAPCPA expanded the hardship test to include private student loans.
As it stands in light of this altered landscape, the Brunner test strays from the intent of section 523(a)(8). The amicus brief suggests use of a standard under which “if repayment of the student loan would prevent the debtor from satisfying ordinary and necessary living expenses so that a debtor could not effectively ‘make ends meet,’ this would be an undue hardship.” This approach is supported by legislative history of section 523(a)(8). Courts applying a standard of “certainty of hopelessness,” or “total incapacity,” require more than Congress intended.
The brief asks the First Circuit to establish a new standard that is workable, considers the text of section 523(a)(8), and is based on the current landscape of higher education and lending practices. The test should ask whether the debtor can maintain a minimal standard of living while repaying the loan. Additional or extraordinary circumstances may, but need not be, considered. The court should not undertake to analyze whether the debtor has acted in good faith with respect to the loan, nor whether she has been improvident in her decision-making.
Finally, the brief argues that the existence of an income-based repayment plan should never be considered when determining whether the debtor is entitled to discharge of her student loans. IBRPs typically involve twenty five year plans, while Congress originally envisioned discharge of student loans after five years. Upon removing the five year discharge provision in 1998 Congress noted the existence of IBRPs and expressly indicated that they did not eliminate the need for hardship discharge. Unlike a discharge in bankruptcy, IBRPs have negative tax consequences, burdensome requirements, and take an emotional toll on debtors. Therefore, substituting a long-term repayment plan with the possibility of loan forgiveness at the end, for discharge “conflicts directly with the court’s obligation to enforce the Code.”Student loans