Observing that some courts have incorrectly interpreted the Brunner test to impose “punitive standards,” Chief Bankruptcy Judge Cecelia G. Morris of the Southern District of New York allowed a debtor to discharge more than $220,000 in student loans, even though the debtor had a law degree and was neither disabled nor unemployable.
The debtor obtained loans to finance his undergraduate education and a law degree between the years 1993 and 2004. With interest, the original principal amount of $116,500 had grown to more than $220,000 when the debtor filed his chapter 7 petition and received a general discharge.
The debtor’s means test listed about $37,500 in annual pre-tax income. His Schedules I and J showed monthly net income after taxes of about $2,500 and expenses of some $4,000, giving him negative current monthly income of about $1,500.
Significantly, the lender did not object to the schedules. Judge Morris therefore said that the debtor’s “income and expenses are undisputed.”
The record on the summary judgment motion shows that the debtor passed the bar but worked as a lawyer less than three months before deciding that he couldn’t stomach being a lawyer. Recently, he ran a camping equipment retail store in Brooklyn that failed and is currently employed as a hiking and camping guide.
The debtor lodged a complaint to discharge his student loans as imposing an “undue hardship” under Section 523(a)(8). The lender and the debtor filed cross motions for summary judgment. In her 12-page opinion on January 7, Judge Morris granted the debtor’s motion and discharged the student loans.
Judge Morris was bound by the Second Circuit’s Brunner decision, handed down in 1987, 18 years before the adoption of the current iteration of the student loan-discharge statute. Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987).
Judge Morris said that Brunner “has received a lot of criticism for creating too high of a burden for most bankruptcy petitioners to meet.” She said that “harsh results” are “often . . . the result of cases interpreting Brunner.”
For instance, Judge Morris insinuated that the requirement of “certainty of hopelessness” does not emanate from the language of Brunner. Similarly, she criticized courts for finding bad faith when a debtor files bankruptcy just to discharge student loans.
Judge Morris vowed that she would “not participate in the perpetuation of these myths.” Instead, she proceeded to “apply the Brunner test as it was originally intended.”
Applying Brunner to the undisputed facts on summary judgment, Judge Morris first dealt with the question of whether the debtor could “maintain a ‘minimal’ standard of living using only Petitioner’s ‘current income and expenses.’” Id. at 396.
Relevant to the first prong of Brunner, Judge Morris said that the lender had accelerated the entire $220,000 debt and that the debtor was not eligible for a repayment plan. Since it was proven that the debtor currently had negative income, she ruled that the debtor met the first test because there was no money left over to repay the loans while maintaining a minimal standard of living.
The second prong of Brunner requires the debtor to show that “additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period . . . .” Id.
In a departure from decisions by some other courts, Judge Morris said that the “Brunner test does not require the Court to make a determination that the [debtor’s] state of affairs are going to persist forever.” Rather, she said, the question is whether the circumstances will persist for “significant portion of the repayment period.” Id.
The repayment period for the debtor had ended, Judge Morris said, because the lender had accelerated. She concluded that the debtor satisfied the second test because the debtor’s “circumstances will certainly exist for the remainder of the repayment period,” given that the loan was accelerated and the repayment period had ended.
On the third prong of Brunner – has the debtor made a good faith effort to repay – Judge Morris said that the debtor sometimes had not paid installments in full but had missed only 16 payments since the consolidated loan was originated in 2005. She noted that the debtor had requested and obtained forbearances on five occasions.
It was not a case, Judge Morris said, where the debtor paid nothing for 20 years. She discharged the student loans because the debtor had satisfied by the third prong of Brunner by having made a good faith effort to repay.
Observations
Prominently, Judge Morris focused on the debtor’s current income, whereas some courts emphasize the debtor’s ability to increase her or his income. In that regard, the acceleration of the loan was significant.
Following acceleration, the lender would be entitled to judgment and to garnish a portion of the debtor’s income. Losing part of his income would be intolerable when the debtor already had negative income after meager expenses.
In that respect, the decision by Judge Morris is similar to an opinion in August by Bankruptcy Judge Peter C. McKittrick of Portland, Ore. Nitcher v. Educational Credit Management Corp. (In re Nitcher), 606 B.R. 67 (Bankr. D. Ore. Aug. 23, 2019).
Judge McKittrick allowed a debtor to discharge all but $16,500 of her $51,800 in private student loans because the loans had been accelerated, and the debtor was facing garnishment when her income was already negative after debt service on the student loans. With regard to the portion that was not discharged, Judge McKittrick in effect compelled the lender to allow repayment at the rate of $150 a month for 110 months without interest. To read ABI’s report on Nitcher, click here.
The opinions by Judges Morris and McKittrick mean that lenders are at greater peril of discharge if they have accelerated student loans. On the other hand, a lender would have little leverage over a debtor to work out a partial repayment plan without accelerating.
If there is an appeal from the decision by Judge Morris, the debtor might argue that Brunner, as interpreted by courts around the country, is more stringent than the “undue hardship” standard enacted by Congress in Section 523(a)(8). Indeed, the debtor might suggest that the court should craft an entirely new standard focusing on the meaning of “undue hardship,” since Section 523(a)(8) came years after Brunner and did not allude to the three-part test in Brunner.
Observing that some courts have incorrectly interpreted the Brunner test to impose “punitive standards,” Chief Bankruptcy Judge Cecelia G. Morris of the Southern District of New York allowed a debtor to discharge more than $220,000 in student loans, even though the debtor had a law degree and was neither disabled nor unemployable.
The debtor obtained loans to finance his undergraduate education and a law degree between the years 1993 and 2004. With interest, the original principal amount of $116,500 had grown to more than $220,000 when the debtor filed his chapter 7 petition and received a general discharge.
The debtor’s means test listed about $37,500 in annual pre-tax income. His Schedules I and J showed monthly net income after taxes of about $2,500 and expenses of some $4,000, giving him negative current monthly income of about $1,500.
Significantly, the lender did not object to the schedules. Judge Morris therefore said that the debtor’s “income and expenses are undisputed.”
The record on the summary judgment motion shows that the debtor passed the bar but worked as a lawyer less than three months before deciding that he couldn’t stomach being a lawyer. Recently, he ran a camping equipment retail store in Brooklyn that failed and is currently employed as a hiking and camping guide.