A district court decision upholding Chief Bankruptcy Judge Dale L. Somers has two important holdings regarding the dischargeability of student loans: (1) Disposable income insufficient even to pay accruing interest can prove “undue hardship” under Section 523(a)(8); and (2) the availability of an income-based repayment program will not automatically preclude the discharge of student loans.
Judge Somers, of Topeka, Kan., held a trial and discharged a consolidated loan representing almost $50,000 of the debtor’s $77,000 in student loans. The lender appealed and lost in a March 17 decision by District Judge John W. Lungstrum of Kansas City, Kan.
The single debtor was 57 years old with no dependents. The interest on his $77,000 in student loans was $503 a month.
The debtor was a union apprentice earning about $2,500 a month. After expenses, Judge Somers found the debtor to have $209 a month in disposable income available to pay student loans. On becoming a journeyman in three years, his income would rise 66%. Even after the debtor’s income increases, the lender conceded that the debtor’s disposable income still would not cover accruing interest.
On appeal, the lender did not challenge the findings about the debtor’s income. The lender only questioned two findings regarding the debtor’s expenses. The debtor listed $550 a month for groceries and dining out. The lender argued that $550 a month was too high to represent a “minimal standard of living.”
Finding support in the record for $550 a month, Judge Lungstrum “defer[red] to the bankruptcy court’s finding on that issue.”
The lender also questioned the debtor’s $125 a month for personal care expenses. Judge Lungstrum said he was “not left with a firm and definite conviction that a mistake has been made in this regard.”
Having upheld Judge Somers’ fact findings on income and expenses, Judge Lungstrum turned to the “undue hardship” standard in the Tenth Circuit. In ECMC v. Polleys, 356 F.3d 1302 (10th Cir. 2004), the Denver-based appeals court adopted its version of the Brunner test. See Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).
Significantly, the Tenth Circuit did not understand Brunner “to rule out consideration of all of the facts and circumstances” nor to require a “certainty of hopelessness.” Polleys, id. at 1309-10. Judge Lungstrum detailed how Polleys put softer corners around all three elements of the Brunner test.
Considering only the debtor’s current circumstances, Judge Lungstrum said that the debtor “easily” satisfied the Brunner test because he could not pay all accruing interest on the student loans while maintaining a minimal standard of living. Even after a pay increase, the debtor still could not completely cover accruing interest, thus showing that his circumstances are “likely to persist.”
The lender contended that the debtor did not meet the Brunner test because he had not sought an income-based repayment program.
The response by Judge Lungstrum may be the most significant part of his opinion. The Tenth Circuit “indicated,” he said, that the repayment program is not dispositive and should be considered only under the third Brunner test, good faith. If it were considered in the first test, maintenance of a minimal standard of living, the availability of a repayment program would always be dispositive and would always bar discharge.
Judge Lungstrum therefore considered the availability of a repayment program along with other “relevant circumstances under Brunner’s third prong.”
The lender contended that failure to apply for reduced payments under a repayment program barred a finding of good faith. Judge Lungstrum countered by saying that not signing up for the program “was reasonable and should not be given controlling weight.” It was “significant,” he said, that the debtor could not cover interest on the student loans, even after his expected increase in income.
On the question of good faith, Judge Lungstrum observed that the debtor had “consistently” made payments for 30 years, when he was employed and able.
“Finally,” Judge Lungstrum said, having the debt hanging over him under a repayment program “may affect the availability of housing or credit.” He also weighed the “emotional and psychological toll on the debtor” if the debt were not discharged.
Judge Lungstrum therefore decided that the debtor had satisfied the third Brunner prong and was entitled to discharge at least some of the student loans.
The lender did not challenge the bankruptcy court’s ability to discharge a portion of the loans. The lender, however, argued that the lower court should have prorated the discharged debt among all of the loans.
Judge Lungstrum disagreed. He said that the Tenth Circuit had “effectively sanctioned” partial discharge given the bankruptcy court’s “equitable power” under Section 105(a).
In terms of selecting the loans to discharge, the bankruptcy court picked the oldest loans with the highest interest rates. Those loans, Judge Lungstrum said, “drive[] the conclusion of undue hardship in this case.” He therefore held that Judge Somers had not abused his discretion because discharging the oldest loans with the highest interest rates had a “rational basis.”
A district court decision upholding Chief Bankruptcy Judge Dale L. Somers has two important holdings regarding the dischargeability of student loans: (1) Disposable income insufficient even to pay accruing interest can prove “undue hardship” under Section 523(a)(8); and (2) the availability of an income-based repayment program will not automatically preclude the discharge of student loans.
Judge Somers, of Topeka, Kan., held a trial and discharged a consolidated loan representing almost $50,000 of the debtor’s $77,000 in student loans. The lender appealed and lost in a March 17 decision by District Judge John W. Lungstrum of Kansas City, Kan.
The single debtor was 57 years old with no dependents. The interest on his $77,000 in student loans was $503 a month.
The debtor was a union apprentice earning about $2,500 a month. After expenses, Judge Somers found the debtor to have $209 a month in disposable income available to pay student loans. On becoming a journeyman in three years, his income would rise 66%. Even after the debtor’s income increases, the lender conceded that the debtor’s disposable income still would not cover accruing interest.
On appeal, the lender did not challenge the findings about the debtor’s income. The lender only questioned two findings regarding the debtor’s expenses. The debtor listed $550 a month for groceries and dining out. The lender argued that $550 a month was too high to represent a “minimal standard of living.”