Reasonable Application of Brunner Test Supports Undue Hardship Discharge

Posted by NCBRC - March 27, 2021

Where the fifty-seven-year-old debtor’s current income and anticipated future income would both be insufficient to pay even the interest on his student loans, his expenses were not excessive, and he acted in good faith, he was entitled to partial discharge under section 523(a)(8), and the bankruptcy court had leeway to determine which of his several loans to discharge. ECMC v. Goodvin, No. 20-1247 (D. Kan. March 17, 2021).

When the debtor filed for chapter 7 bankruptcy, he had two outstanding student loans with ECMC, a Stafford loan, and five student loans issued by the Department of Education. He was a journeyman HVAC worker and expected a salary increase after he completed his training, but he planned to work only ten years before retiring. After a hearing, the bankruptcy court found the debtor had satisfied the standard for showing undue hardship under section 523(a)(8) and granted discharge of one of the two student loans held by ECMC. The remaining loans were not discharged. ECMC appealed to the district court.

When considering an undue hardship claim under section 523(a)(8), courts in the Tenth Circuit apply the three-pronged Brunner test under which the debtor must show: (1) that he “cannot maintain, based on current income and expenses, a ‘minimal’ standard of living” if he is 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 of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.” Applying this test, courts in the Tenth Circuit consider all facts and circumstances relevant to the debtor’s ability to pay.

The district court rejected ECMC’s argument that the bankruptcy court erred in its findings of fact with respect to whether the debtor’s expenses were “reasonable” and whether he could not maintain a minimal standard of living based on his income and expenses. The court found that the bankruptcy court applied the appropriate standard when it found that the debtor “lived a lifestyle far removed from excess.” The court also deferred to the bankruptcy court’s findings as to the non-excessive nature of the debtor’s specific expenses, including $550 for food and dining out, and $125 in personal care expenses. These findings also supported the bankruptcy court’s conclusion that the debtor met the first prong of the Brunner test.

With respect to the second prong of Brunner, the court observed that the Tenth Circuit does not demand that the debtor show a “certainty of hopelessness,” but requires that the debtor’s prospects be based on realistic, articulable expectations tailored to his situation and not extending beyond the life of the loan. Here, the debtor’s expectation of increased income upon completion of his HVAC apprenticeship did not render his prospects for ability to pay any more likely. In fact, his expected increase in income would not be enough to make even the monthly interest payments of $503 on the loans. Further, that income would be substantially reduced upon his retirement at age 67. For these reasons, the court found the debtor met the second prong of the Brunner test.

With respect to the good faith prong of the Brunner test, ECMC pointed to various reduced payment options available to the debtor which would place his loan payments within his ability to pay and cancel the remaining amount due after twenty years. ECMC argued that under these plans, the debtor could continue payments on his loans while maintaining a minimal standard of living and that the debtor’s failure to take advantage of the plans demonstrated bad faith.

The court noted that while the Tenth Circuit considers the availability of reduced payment plans among all the facts and circumstances, that point alone is not dispositive. Further, the availability of such plans is not a factor in the first prong of Brunner relating to the debtor’s current ability to pay, but is considered only with respect to the third prong concerning good faith. The court found the debtor’s failure to participate in a reduce payment plan was not evidence of bad faith. In fact, the court found that requiring the debtor to continue to carry the burden of the loans would contravene the fresh start promised by bankruptcy. Further, because any payments he would make under a plan would be insufficient to pay the monthly interest, his debt would continue to grow even as he paid it off, during which time the emotional burden on the debtor would continue. Finally, at the end of years of paying only on interest, the debtor would likely suffer negative tax consequences from the cancellation of the remaining debt.

The court reasoned that the purpose behind section 523(a)(8) was to discourage recent graduates from using the bankruptcy system to unencumber future income. Given the debtor’s age and the age of the loans, that consideration was not a factor here. Nor was there other evidence that the debtor was trying to abuse the bankruptcy system. The court noted that under ECMC’s arguments, the availability of reduced-payment plans would eviscerate the statutory undue hardship discharge. The court concluded that the debtor had not acted in bad faith.

Having found the debtor satisfied the Brunner undue hardship test, the court turned to the bankruptcy court’s discharge of ECMC’s loan while leaving other loans intact. The court found no requirement that a bankruptcy court granting partial discharge spread the discharge on a pro rata basis among all the outstanding student loans. The court noted that the loan discharged by the bankruptcy court was the oldest loan, had continued to grow despite the debtor’s having paid off more than he borrowed, and represented the largest portion of all the debtor’s student loan debt. The court found, therefore, that the bankruptcy court did not abuse its discretion under section 105(a) when it discharged only the ECMC student loan.

The court affirmed.

Goodvin Appeal Opinion



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