Student Loans Discharged under Totality-of-Circumstances Test

Posted by NCBRC - May 29, 2018

In two recent student loan cases out of the First Circuit, the bankruptcy courts rejected Brunner and, instead, applied a totality-of-circumstances test to grant discharge under section 523(a)(8). Smith v. U.S. Dept. of Ed., No. 16-10998, Adv. Proc. No. 16-1079 (Bankr. D. Mass. April 4, 2018); Erkson v. U.S. Dept. of Ed., No. 16-20169, Adv. Proc. No. 16-2018 (Bankr. D. Me. April 3, 2018).

In Smith, the debtor, 39-year-old Kirt Smith, had multiple physical and mental health problems, including an intractable seizure disorder, depression with suicidal ideation and panic attacks, attention deficit hyperactivity disorder, and various “affective disorders,” for which he had been treated since the age of nine. He lived with his mother. After he obtained an Associate’s Degree from the ITT Technical Institute, he found himself unemployed and almost $50,000 in student loan debt. His income at the time of filing for bankruptcy consisted of food stamps and social security disability. He had been found eligible for an ICRP but was not currently enrolled in one at the time of his bankruptcy.

In Erkson, the debtor, 64-year-old Barbara Erkson, sought to discharge $107,000 in student loans. She obtained a BA at Vermont College of Norwich University and began to pursue a career in counseling. Finding that her income could not support her essentials, she returned to school at Salve Regina University, for a Master of Arts in Holistic Counseling. Ms. Erkson worked full-time after she graduated from that program. Due to changes in Medicare reimbursements, however, Ms. Erkson’s was moved to an administrative  position where a degenerative hearing loss condition made the work difficult. She then moved on to private practice and a part-time position in rehabilitative services. Her employment provided insufficient income to repay her student loans.

Although the First Circuit Court of Appeals has not weighed in on the proper test for determining undue hardship under section 523(a)(8), a BAP for the First Circuit rejected the long-standing test set forth in Brunner and instead adopted a totality-of-circumstances test. Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 800 (B.A.P. 1st Cir. 2010). Both Smith and Erkson followed suit.

In rejecting application of the Brunner test, the Smith court noted that Brunner “tests too much” and inserts a good faith requirement not found in the statute. The Smith court found that a debtor need not establish good faith efforts to repay the loan as a requirement of discharge, and while the availability of ICRPs may be considered under the totality-of-circumstances test, it is not necessarily bad faith when a debtor refuses to enter into one. In fact, ICRPs with their continued application requirements and potential dire tax consequences, may be counter to the debtor’s best interests in the long run. The court further rejected the hard-hearted requirements under the Brunner test of showing “total incapacitation” and “certainty of hopelessness.”

Under the totality-of-circumstances test, a court may consider “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.”

Applying this test in Smith, the court found the evidence of the Mr. Smith’s inability to work and unlikely improvement in that regard was amply supported by medical records and the testimony of his psychiatrist. As to his expenses, the most significant area of dispute between the parties were his monthly video game charges. The court found that for this particular debtor, video games were a necessary distraction from the overall misery caused by his medical conditions. In fact, cessation of the video game expense would not make it possible to pay the student loans as Mr. Smith and his mother with whom he lived, ran a deficit in other household utilities and expenses. Finally, the court found that Mr. Smith’s eligibility for an ICRP did not tip the balance against him. The court, therefore, concluded that his student loans were subject to discharge.

Likewise, in Erkson, the court noted that Ms. Erkson did not have an affirmative duty to demonstrate good faith, but would be required to counter evidence of bad faith if presented. Weighing her expenses against her income, the court found that the deficit was reasonable rather than an indication of extravagance or underemployment on her part.

Like the court in Smith, the Erkson court refused to adopt a per se rule that an eligible debtor must enroll in an ICRP in order to satisfy a good faith requirement. Nor was it persuaded that she acted in bad faith by the fact that her student loans were her largest outstanding debt. The court concluded that the evidence showed Ms. Erkson to be “a hardworking woman who chose an area of study which, due to changes in federal laws and regulations, proved less profitable than she anticipated.” The court concluded that Ms. Erkson’s “age and her professional trajectory belie any notion that she will be able to generate sufficient income in the coming years to repay her student loans while maintaining that minimal standard of living.” It granted discharge of her student loans under section 523(a)(8).

Erkson Bankr ME April 2018

Smith Bankr Mass April 2018



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