In 1987 when it handed down Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987), the Second Circuit claims to have anticipated legislative intent 10 years later when Congress adopted the current iteration of Section 523(a)(8), the statute that makes student loans nondischargeable except when the debtor suffers “undue hardship.”
The debtor owed about $60,000 in student loans. The bankruptcy court ruled that the debt was nondischargeable because the pro se debtor had not shown undue hardship. The district court affirmed, and the debtor appealed to the Second Circuit, this time represented by counsel.
The Second Circuit affirmed on March 11 in an opinion by Circuit Judge José A. Cabranes.
Judge Cabranes characterized the debtor as arguing that “the Brunner test has, over time, become too high a burden for debtors to satisfy.” [Note: If that be a fair characterization of the argument, the relief the debtor sought could only be obtained if the Second Circuit were sitting en banc.]
Judge Cabranes disagreed. He said that the “Brunner test reflects the Section 523(a)(8) statutory scheme exhibiting ‘clear congressional intent . . . to make the discharge of student loans more difficult than that of other nonexcepted debt . . . .’” Id. at 396.
Judge Cabranes laid out the three fact findings that a debtor must establish by a preponderance of the evidence: (1) The debtor cannot maintain a “minimal” standard of living; (2) additional circumstances exist to show that the debtor’s financial condition is “likely to persist for a significant portion of the repayment period,” and (3) the debtor made a good faith attempt to repay the loan.
The debtor failed all three tests, Judge Cabranes said.
On the first test, Judge Cabranes said that the debtor’s income was above the federal poverty level. Her expenses, he said, “allow her to make loan repayments while maintaining a minimal standard of living. Further, [the debtor] failed to undertake steps to improve her overall financial condition and reduce her discretionary expenses.”
According to Judge Cabranes, the debtor was “fairly young” at age 52, in good health, with no dependents and two graduate degrees. Therefore, she failed the second test because she “is able to maintain her current level of income.”
The debtor failed the third test because she had not attempted to consolidate her loans or qualify for income-based repayment programs. Moreover, Judge Cabranes said, the debtor had received $4,000 tax refunds for four years but used none of the money to repay student loans.
Judge Cabranes affirmed the judgment of the bankruptcy court because the debtor had failed to prove her satisfaction of the Brunner tests.
Observations
Brunner is an elaborate test compared to the straightforward “undue hardship” standard adopted by Congress 10 years later in Section 523(a)(8). Had Congress intended to adopt Brunner, this writer assumes that the drafters would have included language in the statute alluding to the elements of the test laid down by the Second Circuit and adopted elsewhere.
Judge Cabranes insinuated that someone above the poverty level cannot show “undue hardship.” Is poverty the bright-line test defining “undue hardship?”
Section 523(a)(8) could be understood to mean that former students are obliged to incur “due hardship” in the course of repaying student loans. What hardship should former students be obligated to endure?
Did Congress mean to say that a former student must pay student loans to the point that the debtor’s disposable income after paying student loans results in a standard of living at the poverty level?
On top of the Brunner test’s departure from the statutory language, there is a long-standing circuit split that warrants Supreme Court review. There are three standards among the circuits, and they are irreconcilable with one another.
Standing alone, the Eighth Circuit developed the so-called totality-of-the-circumstances test, where the court must consider (1) the debtor’s future financial condition, (2) the debtor’s and dependents’ reasonable and necessary living expenses, and (3) “other relevant facts and circumstances surrounding each particular bankruptcy case.” Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003). Rejecting Brunner, the Eighth Circuit said it preferred a “less restrictive approach.” Id.
Brunner is followed in the Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth and Eleventh Circuits.
Although professing to follow Brunner, the Fifth Circuit tightened its already higher standard in 2019 by ruling that a debtor may not discharge a student loan unless “repayment would impose intolerable difficulties on the debtor.” Thomas v. Department of Education (In re Thomas), 931 F.3d 449 (5th Cir. July 30, 2019).
Earlier in In re Gerhardt, 348 F.3d 89, 92 (5th Cir. 2003), the Fifth Circuit held that discharging student loans 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.
What is “undue hardship?” Is Brunner the test? The Supreme Court should intervene if Congress does not ameliorate a statute that can impose life-long penury on some former students.
In 1987 when it handed down Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987), the Second Circuit claims to have anticipated legislative intent 10 years later when Congress adopted the current iteration of Section 523(a)(8), the statute that makes student loans nondischargeable except when the debtor suffers “undue hardship.”
The debtor owed about $60,000 in student loans. The bankruptcy court ruled that the debt was nondischargeable because the pro se debtor had not shown undue hardship. The district court affirmed, and the debtor appealed to the Second Circuit, this time represented by counsel.
The Second Circuit affirmed on March 11 in an opinion by Circuit Judge José A. Cabranes.
Judge Cabranes characterized the debtor as arguing that “the Brunner test has, over time, become too high a burden for debtors to satisfy.” [Note: If that be a fair characterization of the argument, the relief the debtor sought could only be obtained if the Second Circuit were sitting en banc.]
Judge Cabranes disagreed. He said that the “Brunner test reflects the Section 523(a)(8) statutory scheme exhibiting ‘clear congressional intent . . . to make the discharge of student loans more difficult than that of other nonexcepted debt . . . .’” Id. at 396.