Discharging $100,000 in student loans owed by an epileptic debtor who was almost unemployable, Bankruptcy Judge Laurie Selber Silverstein of Delaware wrote a 29-page opinion where she disagreed with “judicial gloss” that results “in a test that is far more onerous than the one first articulated in Brunner.”
The lender has appealed to the district court. If higher courts ultimately reverse Judge Silverstein, it will mean that student loans can never be discharged in the Third Circuit. Retired Bankruptcy Judge Eugene Wedoff said he hopes that “the Third Circuit gives appropriate deference to [Judge Silverstein’s] fact finding.”
Desperate Circumstances
The debtor was 34 years old, unmarried, with no children. He had been epileptic since childhood and continues having grand mal seizures. He filed a chapter 7 petition, received his discharge, then filed a complaint to discharge about $100,000 in student loans incurred to obtain an undergraduate degree.
In the 11 years since graduation, the debtor had only had low-paying jobs. He was unemployed at the time of trial and had no income. After losing his last job, the debtor had applied unsuccessfully for 200 jobs and received no offers. He spent two or three hours a day applying for jobs online.
We will spare the reader a recitation of the debtor’s depressing circumstances. Rather, we will list some of Judge Silverstein’s fact-findings, which are all supported by the record. Since the debtor was the only witness at trial, an appellate court would be hard put to rule that the fact-findings were clearly erroneous.
Some of the judge’s factual conclusions are:
- The debtor was chronically unemployed or underemployed after college. He worked sporadically at low-paying gig work with “little prospect of advancement.”
- Even when he was working, the debtor “avoided living in abject poverty only through significant financial support from his [retired] father” for “his entire adult life.”
- The debtor’s career prospects “are unlikely to improve materially, and . . . his inability to pay his student loan debt will persist.”
- The debtor was never “in a financial position” to pay his student loans.
- The debtor’s “continual search for gainful employment is enough to find good faith.”
Applying Brunner to the Facts
The outcome turned on Section 523(a)(8), where student loans are excepted from discharge unless repayment “would impose an undue hardship.” The Third Circuit has adopted the three-part Brunner test to flesh out the statute.
The first question under Brunner is the debtor’s ability to maintain a “minimal standard of living” while repaying the loan.
Without financial support from his father, Judge Silverstein said that the debtor’s income alone was “insufficient to maintain a minimal standard of living.” She refused to count “third-party charity” from his father as income. In her book, “support is not ‘income’ within the meaning of Brunner.”
The second test considers whether there are “additional circumstances” indicating that the inability to repay the loans will persist for “a significant portion of the repayment period.”
The debtor’s loan matured 10 years after graduation. Judge Silverstein therefore assumed that the loans were either in default or had been accelerated.
Judge Silverstein said there were only two cases discussing whether the repayment period has run out for the purposes of the Brunner test if the loans have matured.
Judge Silverstein said that the debtor had met the second test as a matter of law, because the loans had matured and the repayment period had already ended. She declined to concoct a “hypothetical” repayment period.
Given the “dearth of authority” regarding the legal consequences of matured loans, Judge Silverstein proceeded with the “additional circumstances” analysis in the second phase of Brunner.
Even if “certainty of hopelessness” is the standard regarding “additional circumstances,” Judge Silverstein held that the debtor was not required to prove that epilepsy was “hampering his job prospects.” A “debilitating medical condition undoubtedly” would meet the test “but is not required.”
Instead, Judge Silverstein said that the debtor “does not need to prove that he is entirely forestalled from future employment; rather, he need only prove this his future income will not allow him both to maintain a minimal standard of living and repay the Loans.”
As a matter of fact, Judge Silverstein found that the debtor was “unlikely ever to receive income sufficient to pay his student loan debt.”
To counter the conclusion, the lender argued that the debtor was eligible for an income-based repayment plan under which he would pay nothing, unless his circumstances were to improve. Judge Silverstein disagreed.
If the debtor were paying nothing, Judge Silverstein said, it “would have the effect of completely foreclosing debtors in the lowest income brackets . . . from receiving an undue hardship discharge, a backwards result that would render Section 532(a)(8) a nullity.”
“It cannot be that Congress intended to make it more difficult — or even impossible — to obtain a discharge the lower the debtor’s income,” Judge Silverstein said.
Closing out the second test, Judge Silverstein said it would be “virtually impossible” to repay the loans, “regardless of the length of the hypothetical repayment period.”
The third test requires good faith efforts by the debtor to repay the loans.
As to lack of good faith, the lender decried the debtor’s failure to have made any payments toward the loan. Countering the argument, Judge Silverstein said that the debtor “has never been in a financial condition to do so and has shown good faith in his efforts to maximize income and minimize expenses.” The inability to repay the loans, she said, “stems from inability, not unwillingness.”
Failing to join an income-based repayment program, Judge Silverstein said, “does not preclude a finding of good faith, because his future employment prospects make it unlikely he will ever make meaningful payments on such a plan.”
Judge Silverstein rejected the lender’s argument as “mere speculation” that the debtor might land a lucrative job years into the future.
Discharging the student loans, Judge Silverstein ruled that the debtor had satisfied the third test because he never had discretionary income to “make meaningful payments,” and the record “indicates that this state of affairs will continue.” She added, “he cannot be faulted for declining to enter in[to] an income-based repayment plan.”
Discharging $100,000 in student loans owed by an epileptic debtor who was almost unemployable, Bankruptcy Judge Laurie Selber Silverstein of Delaware wrote a 29-page opinion where she disagreed with “judicial gloss” that results “in a test that is far more onerous than the one first articulated in Brunner.”
The lender has appealed to the district court. If higher courts ultimately reverse Judge Silverstein, it will mean that student loans can never be discharged in the Third Circuit. Retired Bankruptcy Judge Eugene Wedoff said he hopes that “the Third Circuit gives appropriate deference to [Judge Silverstein’s] fact finding.”