by Two recent student loan cases shine a ray of hope for debtors crushed by education-based debts. See Kreiger v. ECMC, No. 12-3592 (7th Cir. Apr. 10, 2013) and Roth v. ECMC, No. 11-1233 (B.A.P. 9th Cir. Apr. 16, 2013).
The first four words in Judge Easterbrook’s opinion out of the Seventh Circuit are: “Susan Kreiger is destitute.” From this opening, the court reversed the district court finding that Ms. Kreiger’s student loan was not dischargeable.
In determining whether a student loan creates an “undue hardship” and is therefore dischargeable under section 523(a)(8), the Seventh Circuit applies the three-part “Brunner” test under which the debtor must show that she: 1) cannot maintain a minimal standard of living for herself and her dependents if forced to repay the loans, 2) that additional circumstances exist that tend to indicate that this condition is likely to persist for a significant portion of the life of the loan, and 3) that she has made a good faith effort to repay the loan. See In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993), quoting from Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987).
The bankruptcy court found that the debtor met this test for dischargeability. 2012 Bankr. LEXIS 1449 (Bankr. C.D. Ill. Apr. 5, 2012). The district court reversed. 482 B.R. 238 (C.D. Ill. 2012).
The inquiry is necessarily fact intensive. The evidence showed that Ms. Kreiger lives with her 75 year old mother in a rural community with few available jobs. She and her mother live on a few hundred dollars a month through government programs, her car is old and in poor condition, she lacks internet access, and is too poor to move. Other facts in favor of dischargeability were that she had sought employment for over a decade, albeit mostly as a paralegal for which she had incurred the loans, and she had used a large portion of a divorce settlement to pay off some of the loan.
While not disagreeing with the bankruptcy court’s factual findings, the district court nonetheless opined that there was reason to think that Ms. Kreiger’s situation may not persist indefinitely. Specifically, she could renew her flagging efforts to find a job and she could avail herself of a payment plan that would have stretched the loan over a 25 year period.
The Seventh Circuit found that the reasoning of the district court with respect to the 25 year repayment plan would essentially eliminate the narrow statutory path to dischargeability of student loans “because it is always possible to pay in the future should prospects improve.” See also Roth v. ECMC, No. (B.A.P. 9th Cir. Apr. 2013) (“Debtor’s participation in the IBRP was not required to find good faith, because imposing such a requirement would replace rights given under § 523(a)(8) with those of an administrative remedy.”). The court distinguished between student loans, which may be discharged under proscribed circumstances, and debts incurred by fraud or crime, which may not. The court found that the district court erred in applying an erroneous rule of law—that a debtor must always agree to a payment plan—and in failing to give proper deference to the bankruptcy court’s factual findings. The circuit court also found that the evidence demonstrated that even if Ms. Kreiger had accepted the payment plan, she would have been unlikely to pay anything on the debt and it would ultimately be forgiven when Ms. Kreiger reached the age of 78. The case boiled down to a “certainty of hopelessness” which more than met the criteria for dischargeability.
The Ninth Circuit BAP in Roth also applied the Brunner test to reverse the bankruptcy court’s finding that the debtor had not established good faith. There, the court considered the debtor’s failure to enter into a 25 year “income based repayment plan” as a point against her, but found that other factors outweighed that consideration. It deferred to the bankruptcy court’s factual findings of various physical and practical hardships, but upon de novo review of the bankruptcy court’s legal conclusions based on those facts, reversed the denial of hardship discharge.
In his concurring opinion, Judge Pappas questioned the continued relevance of the Brunner test in the present economic climate and student loan landscape. He endorsed a less constrained analysis of undue hardship stating that “the analysis required by Pena/Brunner to determine the existence of an undue hardship is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.” Judge Pappas reviewed the travels of the student loan discharge legislation noting that since Brunner, Congress had continually succumbed to pressure by lenders and lobbyists to further restrict access to discharge in ever-expanding areas of student benefits. The Brunner test, which dealt with far more liberal discharge laws when it was established, in today’s climate, had become needlessly restrictive. Judge Pappas also considered the current student lending landscape in which more private lenders are involved, offering loans more freely and without adequate consideration of ability to repay, and in which many of the loans are paying for “for-profit” colleges that do not provide the student with marketable skills. The judge noted that the payment plans offered by lenders are often futile at best and damaging at worst when they result in debt-forgiveness tax consequences, and that “[r]equiring that a debtor demonstrate that his or her financial prospects are forever hopeless is an unrealistic standard.”
Judge Pappas concluded that “The Ninth Circuit should reconsider its adherence to Brunner. It should instead, like a few other courts, craft an undue hardship standard that allows bankruptcy courts to consider all the relevant facts and circumstances on a case-by-case basis to decide, simply, can the debtor currently, or in the near-future, afford to repay the student loan debt while maintaining an appropriate standard of living.”