Court Rejects “Certainty of Hopelessness” and Limits Repayment Period

Posted by NCBRC - August 18, 2017

“[N]otwithstanding a debtor’s potential eligibility for an extended term student loan repayment program, if a debtor chose not to enter such a program in good faith, the repayment period under the second Brunner prong is the remaining contractual term of the debtor’s loan.” Price v. Devos (In re Price), No. 15-17645, Adv. Proc. No. 16-11 (Bankr. E.D. Pa. June 23, 2017).

The debtor, Kristin M. Price, was a twenty-nine-year old, soon-to-be-divorced, mother of three young children. She was educated and trained to work in vascular sonography and was employed part-time in that field. She filed for chapter 7 bankruptcy in October, 2015. At that time, she had an outstanding student loan from the Department of Education which she sought to discharge under section 523(a)(8).

The court applied the three-prong test set forth in Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). It quickly dispensed with the first and third prongs of that test: Ms. Price could not make payments on the loan and maintain a minimal standard of living, and she acted in good faith with respect to the loan.

The dispute centered on the second prong of the Brunner test: whether the current state of Ms. Price’s financial affairs was likely to persist for “a significant portion of the repayment period.” For purposes of analysis, the court divided this prong into two questions: 1) whether the state of affairs is likely to “persist,” and 2) whether it will persist for a “significant portion of the repayment period.”

With respect to the fact-intensive question of the projected persistence of Ms. Price’s financial situation, the court balanced several factors. On the one hand, Ms. Price was young, healthy, currently employed, and licensed in her field (though not licensed in the more general area of sonography that would have opened more employment opportunities to her). On the other hand, she was separated, with three young children with expenses that were likely to change but not decrease for many years, no easy access to the additional education necessary to expand her license to a broader range of employment opportunities, and no way to increase the number of hours she worked in her current job. The court found that, on balance, Ms. Price’s financial distress was likely to persist.

Turning to the second question, the court broke it into two more questions: 1) what is the relevant “repayment period,” and 2) what portion of that period could be deemed “significant?”

The court began with a look at the historical context of Brunner. In 1987, when Brunner was decided, a student loan could be discharged upon a finding of undue hardship or if it had been in pay status for five years prior to bankruptcy (“temporal discharge”). Subsequently, several changes have occurred with respect to student loan debt: 1) Congress lengthened then eliminated the temporal discharge, 2) the rise of income-based repayment programs resulted in extensions of time for some loans of up to twenty-five years, and 3) the student lending industry, and nationwide student loan debt, ballooned. The court noted that, while the statutory temporal discharge was eliminated in favor of the broader “undue hardship” standard, the Brunner analysis includes its own temporal limitation which continues to require a court to determine some limit to the time within which a debtor can be saddled with student debt.

Here, Ms. Price argued that to satisfy the second prong of Brunner, her state of affairs must persist only as long as the contractual loan term: seven years. The DOE, on the other hand, argued that she must show that it is likely to persist until expiration of the longer time period available under an income-based, extended term loan repayment program (IBRP): up to twenty-five years.

The court turned to practicalities. It noted that if a student loan is found nondischargeable due to the availability of an IBRP even though the debtor has no realistic likelihood of ever making payments under the program, both parties lose. The creditor does not recover the loaned funds and the debtor is deprived of the fresh start crucial to bankruptcy. Under the facts of this case, the court found that Ms. Price would not have benefitted from participation in a long-term IBRP and that imposing an IBRP’s temporal limit on the Brunner inquiry would essentially force Ms. Price either to repay the loan under its current terms, or enter into an IBRP notwithstanding that such programs are intended to be voluntary.

The court further found that use of the contractual term over the lengthier IBRP term, would reduce the necessity of delving ever deeper into guesswork concerning a debtor’s future financial health. The court rejected the possibility that declining to take IBRPs into consideration in the analysis of the second Brunner prong would lead to gamesmanship, finding that this contingency was adequately dealt with in the good faith requirement of third Brunner prong. The court therefore concluded that the second prong of Brunner required that it determine whether Ms. Price’s financial state of affairs was likely to persist over a significant portion of the repayment period as specified in the lending agreement.

It then turned to the issue of what constitutes a “significant portion.” Rejecting a strict formulaic approach, the court settled on a five-year look-forward period and found the factual considerations giving rise to its finding of financial hardship were likely to persist over that period.

In granting Ms. Price discharge of her student loan, the court specifically rejected an interpretation of the second prong of Brunner that would require a “certainty of hopelessness.”

This case is currently on appeal to the District Court for the Eastern District of Pennsylvania, Case No. 17-3064.

Price Bankr ED Pa opinion

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