Student Loan Dischargeability Recent Cases under 523(a)(8) Set High Bar for Debtors

Journal Issue

Jun 2006

Column Name

Consumer Corner

Citation

ABI Journal, Vol. XXV, No. 5, p. 14, June 2006

Bankruptcy Code

523

Topic Tags

Consumer Bankruptcy

Discharge/Dischargeability

Journal HTML Content

Congress decided that student loans are beneficial, and that the federal taxpayers'
money should be used to guarantee their repayment. Congress even set up various
programs over the years to allow students to obtain loans directly from the
U.S. Department of Education, the current program being the William D. Ford
Federal Direct Loan Program (Direct Loans).3 As a result, student loans are
very easy to obtain.
However, while student loans are easy to get, they are very difficult to discharge
through bankruptcy. Congress made student loans one of those few types of obligations
that are not discharged by way of the general bankruptcy discharge. Bankruptcy
Code §523(a)(8) provides that student loans can only be discharged if excepting
them from discharge would impose an "undue hardship" on the debtor
and the debtor's dependents. Moreover, with the passage of BAPCPA, Congress
broadened the category of student loans that are not subject to the general
discharge to include virtually every imaginable student loan.4
Since Congress did not define "undue hardship," the courts have had
to figure out what constitutes this level of hardship. The test adopted by the
vast majority of the circuit courts (the only exceptions being the First and
the Eighth) is the test that was first set out in the Second Circuit case Brunner
v. New York State Higher Education Services Corp.5 The so-called
Brunner test requires that the debtor prove by a preponderance of the
evidence all of the following:

<blockquote>
1. that the debtor cannot maintain, based on current income and expenses,
a "minimal" standard of living for herself and her dependents if
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.6 
</blockquote>
In reviewing the recent circuit-level cases, a pattern emerges: Many of the
debtors stumble when it comes to the second and third prongs of the Brunner
test. The "additional circumstances" and "good-faith efforts
to repay" prongs are hurdles that debtors are often not able to negotiate,
even though they may be able to prove that they cannot maintain a "minimal"
standard of living for themselves and their dependents if forced to repay their
loans. The following very brief case summaries are not meant to be a comprehensive
review of recent student loan cases, but they do illustrate the typical problems
faced by §523(a)(8) plaintiffs.7

Sixth Circuit: Olyer
The 2005 Sixth Circuit case formally adopting the Brunner test was Olyer
v. Educational Credit Management Corp. (In re Olyer).8
Both the bankruptcy court and the Bankruptcy Appellate Panel (BAP) had held
that the plaintiff qualified for discharge of his student loans, but the Sixth
Circuit Court of Appeals disagreed and reversed.
The plaintiff's financial situation appeared to be sympathetic: He was 48 years
old, married and had three children. He was pastor of a small church he had
started, and his family's income had been less than $10,000 for the two preceding
years. The family did not have health insurance, and the plaintiff suffered
from a medical condition that had already caused his retinas to detach on multiple
occasions. However, the plaintiff held both bachelor's and master's degrees,
and prior to starting his church, he had worked as a salesman and an audio engineer,
and he had owned his own business.
Applying the Brunner test, the court found that the plaintiff had not
proved that there were "additional circumstances" (as required by
prong two) indicating that the plaintiff's financial situation was going to
continue over a significant portion of the repayment period of his student loans.
"Olyer's choice to work as a pastor of a small start-up church cannot excuse
his failure to supplement his income so that he can meet knowingly and voluntarily
incurred financial obligations. By education and experience, he qualifies for
higher-paying work and is obliged to seek work that would allow debt repayment
before he can claim undue hardship."9

The Olyer court's "undue hardship" analysis was strictly in
relation to prong two of the Brunner test. Failure to satisfy prong two
was enough to fail the test.
Tenth Circuit: Alderete
In Alderete v. Educational Credit Management Corp.,10 the
Tenth Circuit Court of Appeals agreed with the bankruptcy court that the debtors
had failed to satisfy not only the second prong of the Brunner test,
but also the third prong.11

The plaintiffs in Alderete both held associate's degrees in visual communications.
They were young, healthy and had three children. The plaintiffs had not really
tried to find better-paying jobs or additional employment (the husband worked
in landscape maintenance, and the wife worked as a kindergarten assistant during
the school year). The bankruptcy court concluded that it could not find that
the plaintiffs' present circumstances somehow affected their prospects for earning
more money in the future, and the Tenth Circuit agreed.
In addition, the bankruptcy court found that the plaintiffs failed to satisfy
prong three's "good-faith effort to repay" requirement. The plaintiffs
had only made minimal payments on their loans, their student loan debt was 98
percent of their total unsecured debt, and they had failed to consider applying
for the Income Contingent Repayment Plan (ICRP) offered by Direct Loans.12 The
Tenth Circuit agreed that the plaintiffs had also not satisfied prong three.
Consequently, the plaintiffs' student loans were not discharged.
Sixth Circuit: Tirch
The Sixth Circuit case Tirch v. Pennsylvania Higher Education Assistance
Agency (In re Tirch),13 was one that the plaintiff won
at both the bankruptcy court and BAP levels, but lost at the circuit level.
Once again, the plaintiff had problems with the second and third prongs of the
Brunner test.

The plaintiff, who was single and more than 40 years old, held both bachelor's
and master's degrees in counseling. She had been employed as a counselor in
various positions making in the range of $27,000 - $28,000 per year. The plaintiff
claimed to have various long-term medical and emotional problems that prevented
her from working (however, she was working when she filed the adversary proceeding
and she testified that her biggest medical problem was having lost her sense
of taste).
 The Sixth Circuit Court of Appeals did not find anything in the record indicating
that the plaintiff's situation would persist for an appreciable period. In fact,
the plaintiff had testified that she might be able to return to work in six
months to two years. "Indeed, we are hard-pressed to discern, either from
any of these statements or from the entire record, how her condition prevents
her from working now, let alone in the future."14
As to prong three of the Brunner test, the court found that the plaintiff
also failed to show that she had made "good-faith efforts to repay"
the loans. The plaintiff had not availed herself of the ICRP, a fact that was
found to be probative of her intent to repay her loans. In addition, the plaintiff
had only paid a meager amount ($4,093.52, $1,850.77 of which was actually paid
by her alma mater) on loans totaling $84,604.65. Consequently, the Sixth
Circuit found that "undue hardship" had not been proven, and it reversed
the BAP's decision affirming the bankruptcy court's judgment.
Fourth Circuit: Frushour
In the case where the Fourth Circuit Court of Appeals officially adopted the
Brunner test with regard to chapter 7 cases (it had already adopted the
test as to chapter 13 cases15), the plaintiff also could not satisfy
prongs two and three of the Brunner test. In Educational Credit Management
Corp. v. Frushour (In re Frushour),16 a case that the
plaintiff had won at the bankruptcy and district court levels, the Fourth Circuit
reversed.17

In Frushour, the plaintiff had an associate's degree in tourism and
a Florida real estate license. She was more than 40 years old at the time she
filed the adversary proceeding. She had one child (age seven), for whom she
received no support. Neither the plaintiff nor her son had any disabilities.
At the time of the adversary proceeding, the plaintiff was working as a self-employed
decorative painter. However, she had been employed at higher-paying jobs over
the years (for example, as a restaurant manager of the Queen Mary in Long Beach,
Calif.). There was no evidence that the plaintiff was seeking, or had sought,
employment that would pay her more or additional money.
The Fourth Circuit found that the plaintiff did not satisfy prong two of the
Brunner test because "given her college education, real estate license
and restaurant management experience, we are not left with the likelihood that
her present circumstances will extend for the rest of her repayment period or
that she will not be able to pay off her loans at some future date."18
Having a low-paying job "does not in itself provide undue hardship, especially
where the debtor is satisfied with the job, has not actively sought higher-paying
employment, and has earned a larger income in previous jobs."19
In addition, the Fourth Circuit went on to find that the plaintiff failed to
satisfy the "good-faith efforts to repay" prong of the Brunner
test. The Fourth Circuit found that the plaintiff should have considered the
ICRP. "Frushour's only reasons for refusing that option, however, were
that it was not suited for her and she wanted a fresh start. It is hard to see
why these reasons are not simply shorthand for her lack of interest in repaying
her debt."20

Ninth Circuit: Nys
In a very recent case that resulted in a pending remand back to the bankruptcy
court, the Ninth Circuit Court of Appeals agreed with the BAP that prong two
of the Brunner test does not require that "additional circumstances"
be "exceptional" in order to cause an "undue hardship."
In Educational Credit Management Corp. v. Nys (In re Nys),21
an opinion issued on April 26, 2006, the Ninth Circuit found that the bankruptcy
court erred in requiring the plaintiff to show "exceptional circumstances
beyond the inability to pay in the present and a likely inability to pay in
the future."22 However, quoting the BAP's own published opinion
in Nys, the Ninth Circuit noted that the plaintiff does need to prove
that her circumstances are "insurmountable barriers to the debtors' financial
recovery and ability to pay."23

The Ninth Circuit did not express an opinion in Nys as to whether the
plaintiff was entitled to a discharge of her student loans (at time of trial,
she was 51 years old, was making $40,244 per year as a university drafting technician
and owed approximately $85,000 on her student loans). On remand, the bankruptcy
court will need to determine whether the plaintiff has satisfied prong two (albeit
without the "exceptional circumstances" requirement) by showing an
"inability to pay in the present and a likely inability to pay in the future."24
She will need to prove that her inability to pay the loans is not based on lifestyle
choices she has made, and that she does not have a "reasonable opportunity"
to improve her financial situation.25 Moreover, on remand, the bankruptcy
court still will need to determine whether the plaintiff has made "good-faith
efforts to repay" her student loans.
 It will be interesting to see what happens in Nys on remand.26
Will the plaintiff have more luck proving "undue hardship" than did
the plaintiffs in Olyer, Alderete, Tirch and Frushour?

Conclusion
If these few cases suggest anything, it is that the Brunner test can
be a very difficult one for plaintiffs to satisfy. Even in cases where the plaintiffs'
situations appear, at first blush, to be sympathetic, they often fail to satisfy
the second and third prongs of the Brunner test.
"Undue hardship," under Bankruptcy Code §523(a)(8), is a term
that speaks volumes to those of us who handle student loan dischargability cases,
but it also has a colloquial meaning. Understandably, it is sometimes difficult
for the uninitiated to come to grips with the meaning of "undue hardship"
when it comes to student loan dischargeability.
<blockquote> </blockquote>

<hr>
<h3>Footnotes</h3>

1 The author would like to thank Arthur Kim, a Southwestern Law School May
2006 J.D. candidate, for his assistance on this article.

2 The views and opinions expressed herein are solely those of the author and
should not be attributed to the U.S. Attorney's Office or the U.S. Department
of Justice. 
3 Information on the William D. Ford Federal Direct Loan Program can be found
at www.ed.gov/offices/OSFAP/DirectLoan/index.html. 
4 In addition to government-made, insured or guaranteed student loans, and
student loans made by nonprofit institutions, "any other educational loan
that is a qualified education loan, as defined in §221(d)(1) of the Internal
Revenue Code of 1986, incurred by a debtor who is an individual" is now
excepted from discharge. 11 U.S.C. §523(a)(8)(B). 
5 831 F.2d 395 (2nd Cir. 1987). Circuit-level decisions adopting the Brunner
test: 3rd Cir.: Pennsylvania Higher Education Assistance Agency v. Faish
(In re Faish), 72 F.3d 298, 306 (3d Cir. 1995); 4th Cir.: Educational
Credit Management Corp. v. Frushour (In re Frushour), 433 F.3d 393,
399 (4th Cir. 2005); 5th Cir.: U.S. Department of Education v. Gerhardt,
348 F.3d 89, 91 (5th Cir. 2003); 6th Cir.: Olyer v. Educational Credit Management
Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); 7th Cir.:
In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993); 9th Cir.: United
Student Aid Funds Inc. v. Pena (In re Pena), 155 F.3d 1108, 1112
(9th Cir. 1998); 10th Cir.: Educational Credit Management Corp. v. Polleys
(In re Polleys), 356 F.3d 1302, 1309 (10th Cir. 2004); 11th Cir.: Hemar
Insurance Corp. of America v. Cox (In re Cox), 338 F.3d 1238, 1241
(11th Cir. 2003). My sincere apologies to the First and Eighth Circuits, but
this article will only discuss cases from those circuits that have adopted the
Brunner test.

6 Brunner, 831 F.2nd at 396. 
7 It is worth noting that the dischargeability of Health Education Assistance
Loans (HEALs) is governed by 42 U.S.C. §292f(g), not §523(a)(8). 
8 397 F.3d 382, 385 (6th Cir. 2005). 
9 Id. at 386. 
10 412 F.3d 1200 (10th Cir. 2005). 
11 The Tenth Circuit reversed the bankruptcy court's decision to give the plaintiffs
a partial discharge of the loans.

12 Information on the ICRP can be found at www.ed.gov/offices/OSFAP/ DirectLoan/index.html.
It is a payment plan that takes income and family size into account. 
13 409 F.3d 677 (6th Cir. 2005). 
14 Tirch, 409 F.3d at 681. 
15 Ekenasi v. Educational Resources Institute (In re Ekenasi),
325 F.3d 541, 546-49 (4th Cir. 2003). 
16 433 F.3d 393 (4th Cir. 2005).

17 Senior Circuit Judge Hamilton concurred in part and dissented (strongly)
in part. 
18 Id. at 402. 
19 Id. at 401. 
20 Id. at 403.

21 2006 WL 1084349 (C.A. 9) (April 26, 2006). 
22 Id. at *6. 
23 Nys v. Educational Management Corp. (In re Nyes), 308 B.R.
436, 444 (BAP 9th Cir. 2004) (emphasis added). 
24 Nys, 2006 WL 1084349 at *6.

25 Id. at *5. 
26 I am informed that a petition for rehearing en banc will be filed,
so it is possible that this case will not be back before the bankruptcy court.
Stay tuned.

Journal Authors

Catherine E. Bauer

Journal Date

Thursday, June 1, 2006 - 12:00

Bankruptcy Rule

2006

none