The Second Circuit’s Brunner Affirmation: Not a Death Knell for Dischargeability

February 2020 brought some good news for borrowers hoping to discharge their student loans in bankruptcy with Judge Cecelia Morris’s decision in Rosenberg v. N.Y. State Higher Educ. Servs. Corp.[1] That hope seemed to be quashed again by the Second Circuit in March in an appeal by a different debtor in Tingling v. United States Dep’t of Educ.,[2] but a closer reading of the underlying facts should give most borrowers — particularly those who have made payments on their loans in the past — some reason to avoid despair.

Janet Tingling, a 50-something debtor with multiple advanced degrees and no dependents, sought to have her federal student loans discharged in her chapter 7 case. The bankruptcy court, district court and Second Circuit all agreed: The debtor did not meet the Brunner standard because (1) her expenses included thousands of dollars in charity contributions each year;[3] (2) she was pursuing a Ph.D. during her bankruptcy case, which might have resulted in a salary increase;[4] (3) she received more than $20,000 in tax refunds during the previous five years, none of which went toward her student loans;[5] and (4) she had never made a payment on the student loans in question,[6] nor had she pursued any income-based repayment programs.[7] She therefore failed to show that she could not meet a minimal standard of living while paying her student loans, there were no additional circumstances that would show otherwise, and she had not shown good faith in making payments toward, or otherwise addressing, her loans.

Some may see this as a death blow to the recent efforts to soften the application of the Brunner standard. Indeed, the court did state that it disagreed with the debtor in her submission that the Brunner standard had become too high of a burden.[8] But this debtor was unlikely to meet any understanding of an “undue hardship” standard.

Those who advocate against removing student loans from the discharge exception often raise the spectre of the mythic nefarious student borrower who emerges from school with the great opportunity to make a large salary, only to immediately discharge their student loans in bankruptcy.[9] Such a debtor could not exist under any formulation of § 523(a)(8), which originally required five years between inception of the student loans and total dischargeability, and was extended several times before taking on its current form. But this spectre’s closest cousin may be someone like this debtor, a person who continues to pursue education funded by student loans while simultaneously seeking to discharge the student loans she has already accrued. Add to that a failure to make any payment on any of her student loans, despite receiving thousands of dollars in tax refunds, and an income significantly above the poverty level, and we have a recipe to not just soften the Brunner standard, but upend the meaning of “undue hardship” all together.

It is unlikely that the Tingling decision will serve as a roadblock for any and all Second Circuit debtors who seek to discharge their student loans. It is also unlikely that Tingling will be the last word on the Brunner standard. The Supreme Court has another opportunity to review the circuit split between the First and Eighth Circuit’s “totality of the circumstances” standard and the Brunner standard.[10] Whether the Court takes the opportunity remains to be seen, but in the meantime, debtors who may be more sympathetic, and in particular those who have made any payments on their loans in the past, should not be cowed by the Second Circuit’s decision.