Bankruptcy Judge Jack B. Schmetterer of Chicago discharged about $73,000 in student loans owed by a 53-year-old single woman who had been unemployed for 16 months, had no income, was not eligible for unemployment compensation, had given up her car, was living rent-free with a friend, and fed herself with food stamps.
The debtor was able to discharge her student loans because she was represented pro bono by William J. Barrett, a partner with Barack Ferrazzano Kirschbaum & Nagelberg LLP of Chicago.
The Destitute Debtor
The debtor took down about $21,000 in student loans to graduate from college in 1990. Over the ensuing years, she made almost 100 monthly payments totaling some $30,000. In other words, she had paid about 140% of the original principal balance of the loans. With interest, though, the outstanding balance had grown to about $73,000 by the time she filed a chapter 7 petition and discharged about $145,000 in debt, not including student loans.
During times of unemployment and low income, she applied for and sometimes received deferments.
In his February 25 opinion, Judge Schmetterer said that “debtors face an uphill battle for relief from their student loans through the difficult-to-meet Brunner test to determine ‘undue hardship’” under Section 523(a)(8). Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987).
Judge Schmetterer made other pregnant observations. For example, he said that “the Brunner test does not require the debtor to live a life of poverty to pay back his or her student loans.” He also noted how the Seventh Circuit had backed off from the “certainty of hopelessness” standard.
For Judge Schmetterer, it wasn’t a close case. He said that the debtor’s “current situation, quite frankly, is nowhere near sufficient to meet a minimum standard of living.” He said the lender was “pointing to pennies that may be saved when much more is needed for [the debtor] to maintain a minimum standard of living.”
With regard to the Brunner requirement of showing that circumstances are likely to persist, Judge Schmetterer that the debtor’s unsuccessful “sixteen month search without finding work is enough to determine that the circumstances are likely to persist for a significant period of the repayment period.”
Judge Schmetterer found the debtor to be “truly destitute and has been in this strait for well over a year without any respite.” Finding that the debtor had met all of the requirements in the Brunner test, Judge Schmetterer discharged the student loans because the debtor had “no prospect of being able to repay the loans at any time in the foreseeable future.”
Observations
The “undue hardship” standard in Section 523(a)(8) does not require a debtor to be destitute, but it seems as though debtors are discharging student loans only if they are destitute, unemployable, permanently disabled or living on food stamps. In other words, it appears as though debtors are discharging student loans only when their circumstances are more dire than the statute requires.
What’s the root of the problem? Is it the statute, the Brunner test, or the courts’ application of the Brunner test?
Unless Congress shows an inclination to revisit the dischargeability of student loans, this writer urges the circuits to revisit Brunner and decide whether the test comports with Section 523(a)(8) and whether Brunner is being properly applied.
Otherwise, deserving debtors are unlikely to discharge student loans unless they are lucky enough to find a lawyer like Mr. Barrett who is willing to volunteer his firm’s services for nothing. As Mr. Barrett told ABI, it would have been cheaper for his firm to pay off the student loans than to devote the time necessary for the client to win a discharge of the debt.
Bankruptcy Judge Jack B. Schmetterer of Chicago discharged about $73,000 in student loans owed by a 53-year-old single woman who had been unemployed for 16 months, had no income, was not eligible for unemployment compensation, had given up her car, was living rent-free with a friend, and fed herself with food stamps.
The debtor was able to discharge her student loans because she was represented pro bono by William J. Barrett, a partner with Barack Ferrazzano Kirschbaum & Nagelberg LLP of Chicago.
The Destitute Debtor
The debtor took down about $21,000 in student loans to graduate from college in 1990. Over the ensuing years, she made almost 100 monthly payments totaling some $30,000. In other words, she had paid about 140% of the original principal balance of the loans. With interest, though, the outstanding balance had grown to about $73,000 by the time she filed a chapter 7 petition and discharged about $145,000 in debt, not including student loans.
During times of unemployment and low income, she applied for and sometimes received deferments.
In his February 25 opinion, Judge Schmetterer said that “debtors face an uphill battle for relief from their student loans through the difficult-to-meet Brunner test to determine ‘undue hardship’” under Section 523(a)(8). Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987).