Fifth Circuit Makes Student Loans Even More Difficult to Discharge

In the Fifth Circuit, student loans are arguably more difficult to discharge than elsewhere. The New Orleans-based appeals raised the already-high bar by holding that student loans may not be discharged unless “repayment would impose intolerable difficulties on the debtor.”

To meet the Brunner/Gerhardt test in the Fifth Circuit, a debtor evidently must be both disabled and unemployable.

The Disabled Debtor

The debtor was a woman who contracted diabetic neuropathy after taking down $7,000 in student loans. The affliction is a degenerative condition that causes pain in the legs and feet. The debtor could not hold down jobs requiring her to stand and was unable to land a sedentary job. 

The debtor filed a complaint to discharge the student loans, alleging she had shown “undue hardship” as required by Section 523(a)(8). 

Bankruptcy Judge Harlan D. Hale of Dallas opened his opinion by saying that some debtors seeking to discharge student loans in his court “appeared to satisfy the plain language of the statute, which merely requires that the debt, if excepted from discharge, would impose an ‘undue hardship’ on the debtor and the debtor’s dependents.”

In his 15 years on the bench, Judge Hale said he had never discharged a single student loan over an objection by the lender, because “none have satisfied the demanding standard adopted as controlling law in this Circuit.” He was referring to In re Gerhardt, 348 F.3d 89 (5th Cir. 2003), authored by Circuit Judge Edith H. Jones. 

Although Judge Hale said he had “sympathy” for the debtor’s “situation,” he was constrained to rule that Gerhardt barred discharging the debt. He said the debtor conceded that she was “unable to show she is completely incapable of any employment now or in the future.”

Although the district judge was similarly sympathetic to the debtor’s plight, he upheld the judgment for the reasons given by Judge Hale. On appeal to the Fifth Circuit, the debtor and amici implored the appeals court to revisit Brunner and Gerhardt.

The Fifth Circuit rebuffed the debtor’s appeal in an 11-page opinion on July 30, written by Judge Jones, who had been Gerhardt’s author. 

The Brunner/Gerhardt Standards

Judge Jones explained that eight circuits, in addition to the Fifth Circuit, have adopted the so-called Brunner test laid down by the Second Circuit in 1987, years before the adoption of Section 523(a)(8) as it now reads. Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987).

To discharge student loans under Brunner, the debtor must prove that (1) she cannot maintain a “minimal standard of living” if forced to repay the loan, (2) additional circumstances show that the state of affairs is likely to persist for a significant portion of the repayment period, and (3) the debtor has made a good faith effort to repay the loans.

As the bankruptcy court had concluded, Judge Jones said that the debtor failed the second part of the test regarding the persistence of her inability to work. 

Applying the gloss on Brunner added by Gerhardt, Judge Jones said that the second part of the test is “exceptionally demanding.” She said it requires the debtor to “show that circumstances out of her control have resulted in a ‘total incapacity’ to repay the debt now and in the future.” Gerhardt, 348 F.3d at 92.

Judge Jones rejected the debtor’s contention that Brunner/Gerhardt is inconsistent with the plain meaning of “undue hardship.” She also rebuffed the debtor’s argument that the Fifth Circuit should adopt the Eighth Circuit’s more lenient “totality of the circumstances” test. Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003).

Judge Jones said the debtor failed the second part of the Brunner test because she admitted that she was “capable of employment in sedentary work environments.” The circuit judge also said there was no evidence that the debtor’s “present circumstances, difficult though they are, are likely to persist throughout a significant portion of the loans’ repayment period.”

The debtor’s critiques of Brunner/Gerhardt were “unconvincing,” Judge Jones said, in view of the history of the repeated legislative tightenings of the student loan dischargeability statute. She said that “the series of amendments clearly evinces an intent to limit bankruptcy’s use as a means of offloading student loan debt except in the most compelling circumstances.”

Judge Jones consulted the dictionary definitions of “undue” and “hardship” to conclude that Congress means for student loans to be dischargeable only when the debt “would impose intolerable difficulties for the debtor.” She went on to say that Section 523(a)(8) “proscribe[s] student loan discharges in all but the most severe circumstances.”

Upholding the nondischargeability of the student loans, Judge Jones said that adopting the Eighth Circuit’s “totality of the circumstances” test would risk “creating intolerable inconsistency of results.”

The ABI Commission Recommendation

Reacting to the Fifth Circuit’s refusal to revisit Brunner/Gerhardt, Rudy J. Cerone told ABI, “It will take either an en banc reversal or a statutory revision by Congress to effect a change.” Cerone, from McGlinchey Stafford PLLC in New Orleans, was a member of ABI’s Commission on Consumer Bankruptcy.

The ABI commission’s Final Report said that Brunner, “[i]f reasonably applied, . . . can allow appropriate bankruptcy relief during a period when discharge of student loans is not otherwise available.” The commission went on to recommend that Congress “return to the pre-1998 rule that allowed student loans to be discharged after seven years from the time they first became payable. Before seven years, student loans would be dischargeable only upon a finding of undue hardship.”

The commission also recommended that “only student loans made, insured, or guaranteed by a governmental unit receive any protection from discharge.”

To read the commission’s report, click here.