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The Dischargeability of Student Loan Debt in the Sixth Circuit
How federal bankruptcy courts treat the dischargeability of student loan debt has led to some controversy over the years. Indeed, this issue has plagued courts because it forces courts to weigh the equitable considerations that underlie bankruptcy, specifically a fresh start for the honest debtor versus the practical considerations presented when a party seeks to discharge what can sometimes amount to six figures’ worth of unsecured debt.
The discharge of student loan debt in bankruptcy is governed by 11 U.S.C. § 523(a), which states: “A discharge under … this title does not discharge an individual debtor from any debt … (8) unless excepting such a debt from discharge under this paragraph would impose undue hardship on the debtor and the debtor’s dependents.” Therefore, there is a presumption against discharge unless “undue hardship” is shown by the debtor. The statute does not define “undue hardship,” and thus courts are left to determine the meaning of “undue hardship” and, consequently, what the debtor must show to meet this burden. The burden is a rather rigorous standard for the debtor to meet in most instances.
One reason such a rigorous standard exists stems from the statute being written in 1976, at a time when tens of thousands of students were attempting to discharge their loans, a circumstance that nearly brought the student loan program to insolvency. The second reason such a standard exists is that by requiring a debtor to prove undue hardship, the court prevents abuse to the bankruptcy and student loan systems by limiting the instances where debtors receive full relief of their loan debt. Students may abuse the system by paying for college with government funded loans or private loans and then subsequently file bankruptcy for the express purpose of discharging these loans. In crafting the statute however, Congress noted that some circumstances exist where an exception to nondischargeability should be made. Congress thus drafted Section 523(a)(8) to give the deserving debtor some recourse, while requiring the debtor to show more than simply the ordinary level of hardship experienced by most debtors.
Establishing a consistent “undue hardship” standard for courts is difficult because the legal issues presented are often so fact-driven. The Second Circuit’s holding in Brunner v. N.Y. Higher Educ. Serv. Corp. (In re Brunner) presents the baseline analysis for determining undue hardship; this standard has been adopted by many courts across the country.
Brunner examined the legislative history underlying the statute and developed a three-pronged analysis to determine whether a debtor may discharge his or her loans for undue hardship. First a debtor must show “[that] the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to pay back the loans.” Second, the debtor must show “[that] additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and [third] … that the debtor has made good faith efforts to repay the loans.” The court reasoned that since the first prong was used frequently in the circuit, it was a logical metric to apply, and also that the first prong is consistent with common sense. The second prong serves as a strong metric that the exceptional circumstances claimed by the debtor suggest there is not only a current financial problem, but there is also an ongoing financial problem that exists which demonstrates that repayment is unduly burdensome. The Second Circuit did not provide reasoning regarding why it chose the third prong of Brunner. Other courts in interpreting Brunner hold the third prong serves the legislative intent of 523(a)(8) by preventing potential abusers of the bankruptcy system from filing a bad-faith bankruptcy petition to rid themselves of student loan debt.
Sixth Circuit Treatment
The Sixth Circuit Court of Appeals for many years applied a variation of the Brunner Test in rulings dealing with § 523(a) discharge. However, in its 2005 decision in Oyler v. ECMC (In re Oyler), the Sixth Circuit officially adopted the three-pronged analysis from Brunner (Brunner Test) as the best rubric under which to analyze claims of undue hardship under Section 523. The debtor must independently establish each element by the preponderance of the evidence.
Debtor Cannot Maintain a Minimal Standard of Living
The first prong of the Brunner Test requires the debtor to show that the debtor cannot maintain a minimal standard of living if forced to repay his or her loans. This first prong requires courts to perform very fact-intensive inquiries to determine what constitutes a minimal standard of living for each debtor. Bankruptcy courts are reticent to create bright-line rule into what satisfies a “minimal standard of living” but do recognize some guidelines such as:
1. [P]eople need shelter, shelter that must be furnished, maintained, kept clean and free of pests. In most climates it also means heated and cooled …. 2. People need basic utilities such as electricity, water and natural gas. People need to operate electrical lights, to cook, to refrigerate. People need water for drinking, bathing, washing, cooking and sewer. They need telephones to communicate …. 3. People need food and personal hygiene products. They need decent clothing and footwear and the ability to clean those items when those items are dirty. They need the ability to replace them when they are worn…. 4. People need vehicles to go to work, to go to stores, and to go to doctors. They must have insurance for, and the ability to buy tags for those vehicles. They must pay for gasoline. They must have the ability to pay for routine maintenance such as oil changes and tire replacements, and they must be able to pay for unexpected repairs …. 5. People must have health insurance or have the ability to pay for medical and dental expenses when they arise. People must have at least small amounts of life insurance or other financial savings for burials and other final expenses …. 6. People must have the ability to pay for some small diversion or source of recreation, even if it is just watching television or keeping a pet.
Meeting the first prong does not require that a person give up everything he or she owns such as a house, or internet, cable and telephone. Other bankruptcy courts do not believe that discharging student loan debt and payment to creditors should come at the expense of owning a home. Regarding cable and cellular telephone, while some courts find it an unnecessary expense, at least one court in the Sixth Circuit found it reasonable expense both for entertainment purposes and also because the ability to work from home via the internet can facilitate job opportunities.
The Western District of Tennessee has been explicit in its treatment of the first prong of Brunner by noting that courts ought to be examining whether the debtor can reasonably afford to pay the loan while supporting the debtor and any dependents by holding that “… this, like so much else in a bankruptcy, is a totality-of-the-circumstances examination.”
The court is generally concerned with whether the debtor exhibited an attempt to maximize their income and minimize expenditures. This standard does not require the debtor to live in poverty in order to discharge student loans properly, though it does mean the court expects the debtor to do some “belt-tightening” and forego some of the finer amenities of life.
Another metric courts use to measure the debtor’s compliance with the first prong of Brunner is whether the debtor has attempted to maximize income by seeking employment outside his field. In Nixon, where the debtor was a former PhD. whose doctorate was taken away because of plagiarism, the bankruptcy court ruled the debtor satisfied the first prong of Brunner because she sought low-paying clerical positions and data entry positions well below her educational level, but to no avail. Moreover, the debtor cannot simply allege that he or she cannot find a job; the debtor must show some substantive proof supporting why he or she cannot find a job.
The Circumstances Are Likely to Exist for the Foreseeable Future
Brunner’s second prong precludes debtors who are suffering in the short term from availing themselves of the benefit of discharge. The Sixth Circuit in Barrett succinctly summarized the second prong of Brunner by requiring the debtor to show:
that circumstances indicate a certainty of hopelessness, not merely a present inability to fulfill financial commitment … such circumstances may include but are not limited to illness, disability, a lack of useable job skills, or the existence of a large number of dependents … [but] ultimately the most important factor is that the additional circumstances must be beyond debtor’s control, not born of free choice.
Often, debtors argue that a particular malady or ailment persists and that this ailment serves as the reason the debtor cannot fully repay the loan debt. A debtor must show more than the mere existence of a medical condition in order to satisfy the second prong of Brunner. Courts generally require the debtor to present evidence of a close nexus between the medical condition and its effect on the debtor’s employment. In In re Morrow, a woman claimed she could not find a job because she had broken her leg and also suffered from asthma. The court found since she presented no substantive evidence that the long-term effects of either the leg or her asthma were the reason she could not work, she did not satisfy the long-term effects prong of Brunner.
This close nexus comes in a variety of forms as the Court of Appeals noted in In re Barrett. In Barrett, the debtor suffered from avascular necrosis, a disease that causes the bones to die from lack of blood flow. The disease required the debtor, who had bachelor’s and master’s degrees, to undergo multiple surgeries just to hold his body together, and also caused him so much pain that he could not hold a cup of coffee. The debtor testified in an adversary proceeding at length about his medical problems, but he did not present expert evidence supporting his conclusions. He did though present a letter from his doctor supporting his testimony. On appeal, the creditor argued that the debtor did not meet prong two because the debtor did not present expert testimony supporting the statement he gave the court. The court rejected that argument and held that since the debtor testified clearly and cogently about his medical past and present medical conditions, presented a letter from his doctor in support of his assertions, and detailed how his ailment prevents him from holding a job worthy enough to allow him to repay his loans, he satisfied the second prong of Brunner. Even without expert testimony, the court held the debtor “precisely identif[ied] his problems and explain[ed] how his condition would impair his ability to work in the future” and thus satisfied Brunner.
The court also faces particularly difficult issues analyzing prong two of Brunner when faced with visually impaired debtors who seek discharge of student loan debt. In Wallace v. Educ. Cred. Mgmt. Corp., a visually impaired debtor sought discharge of his student loan debt. The creditor argued certain employment options are not completely foreclosed to visually impaired debtors and presented evidence that new technologies are in fact available to train visually impaired people in many jobs. The court noted that any court may take judicial notice that blindness either satisfies prong two or does not satisfy prong two. The Wallace court ultimately withheld its final decision for 18 months to determine whether the debtor’s blindness would result in a long-term deficiency.
Good Faith Effort of Debtor to Repay the Loan
The third and final prong of the Brunner analysis requires that the debtor has made a good faith effort to repay the loan. The Sixth Circuit’s decision in Rice v. U.S. persuasively lays out metrics by which courts may examine a debtor’s finances to determine if the good faith prong is met. Under Rice, courts may look to: the debtor’s efforts to timely repay the loan; the additional debt the debtor took on despite the student loan debt; and the overall ratio of student loan debt to aggregate debt owed by the debtor.
In analyzing this prong, courts seek to ensure the debtor is not seeking to avail himself of the benefits of bankruptcy on the eve of loans becoming due or to abuse the system. In In re Cheesman, the court found the debtor satisfied the good faith prong because the Cheesmans made minimal payments on their loans even years after the loans became due and made them at least a year before filing for bankruptcy. Particularly important was the lack of any indication the Cheesman’s were discharging their loans before beginning high-paying careers in the private sector, as they were public school teachers in rural Tennessee.
In some cases, courts have discharged loans where the debtor made no payments at all. The debtor in In re Barrett, suffered serious medical problems that precluded making any payments on his student loan debt. In examining Barrett’s claim under prong three of Brunner, the court found that even though the debtor had not made a single payment on his loan debt, the fact he sought deferments of the loan was indicative of his good faith. This, taken in conjunction with the evidence he presented of his worsening health and his attempts to obtain employment in spite of his health, was enough to satisfy the good faith prong.
Additionally, courts look to see if a debtor is utilizing the federal government’s Income Contingent Repayment Plan, as a sign of good faith, though non-enrollment in this program is not per se an indication of lack of good faith. Indeed circumstances exist where enrollment in this program can adversely affect the debtor either for tax reasons or because it would force the debtor to repay a higher amount than was previously loaned.
Partial Discharge of Student Loan Indebtedness under § 105
Noting the harsh realities that a debtor faces in establishing undue hardship, the Sixth Circuit has fashioned a middle ground of sorts to give debtors some relief via the bankruptcy courts equitable powers pursuant to Section 105 of the Bankruptcy Code for the purpose of achieving the goal of a fresh start for the honest debtor while preventing abuse of the student loan system. Indeed courts have noted that requiring repayment of the entire debt could create an undue hardship, but repayment of a portion of the entire debt may not create an undue hardship. Thus they allow a partial discharge of a portion of the debt that creates an undue hardship. In In re Hornsby, the debtors owed more than $30,000 in student loan debt. The court noted that since a bankruptcy court is a court of equity, it is therefore guided by equitable doctrines. In student loan discharge cases where undue hardship cannot be established in full, there are circumstances where a court may take action to intervene on behalf of the debtor. Here, the court found that an all-or-nothing treatment of the Hornsby’s student loans undermined the purpose of the Bankruptcy Act and therefore allowed a partial discharge. In order to achieve a partial discharge, a debtor must meet all three prongs of Brunner with respect to the portion of the debt the debtor does seek to be discharged.
The Sixth Circuit in some situations utilizes its equitable power to refrain from ruling in a particular case in order to give the debtor time to modify or better his financial situation, such as in Cheesman where the court stayed its final order to wait and see if the debtor’s financial situation improved. In In re Wallace, a blind debtor established all the elements of Brunner except that his circumstances would persist for a foreseeable period of time. In that case, the court exercised its equitable power under Section 105(a) of the bankruptcy code to stay its ruling for 18 months on whether the debtor’s student loan may be discharged, because the court wanted the debtor to explore other employment opportunities specifically geared towards the visually impaired.
The Sixth Circuit is proactive in its treatment of debtors with student loan debt and has joined several other Circuit Courts of Appeal in explicitly adopting Brunner as the standard by which to measure student loan debt discharge. Implicit in many of the courts’ holdings though is the reality that every bankruptcy case presents a different balancing act, and thus, strict adherence to the Brunner test is not always in the best interest of debtor or society. Knowing this, the Circuit has been proactive and successful in weighing the congressional intent and policies behind § 523 discharge versus the practical reality and circumstances that every debtor faces in filing for bankruptcy. The results of this evaluation become apparent when the court does things such as refuse to adopt a bright-line rule for what a “minimal standard of living” is; in how it determines “good faith”; and also by allowing partial discharge. Cases such as In re Barrett, In re Hornsby and In re Cheesman are illustrative of this point. By leaving room for latitude in its decision-making, the court is in the best position to render the most fair and equitable outcome for all parties.
- In In re Nixon, 453 B.R. 311 (Bankr. S.D. Ohio 2011), the plaintiffs sought to discharge an aggregated sum of over $270,000 in student loan debts.
- 11 U.S.C. § 523(a)(8).
- Grant v. U.S. Dept. of Educ. (In re Grant), 398 B.R. 205, 209 (Bankr. N.D. Ohio 2008) (citing Report on the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 93 137, 93rd Cong., 1st Sess., Pt. II 140, n.14 (1973)). See also Andrews Univ. v. Merchant, 958 F.2d 738, 740 (6th Cir. 1992) (noting student loans are unlike commercial transactions where there is collateral; student loans are extended under the premise the debtor will have income to pay the debt later on).
- Grant v. U.S. Dept. of Educ. (In re Grant), 398 B.R. 205 (Bankr. N.D. Ohio 2008).
- The Circuits that have already formally adopted the “Brunner Test” are the Third, Fifth, Seventh, Ninth, Tenth and Eleventh Circuit Courts of Appeal. Oyler v. ECM (In re Oyler), 397 F.3d 382 (6th Cir. 2005).
- Id. at 396.
- See generally Lehman v. New York Higher Educ. Serv. Corp. (In re Lehman), 226 B.R. 806, 808-09 (Bankr. Ct. D. Vt. 1998)
- Oyler v. ECMC (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005).
- Barrett v. ECMC (In re Barrett), 487 F.3d 353, 358 (6th Cir. 2007).
- Nixon v. Key Educ. Resources (In re Nixon), 453 B.R. 311, 327 (Bankr. S.D. Ohio 2007); see Afflitto v. U.S. (In re Afflitto), 273 B.R. 162 (Bankr. W.D. Tenn. 2001) (stating, “[T]his Court finds ‘minimal’ to be a flexible and subjective term than can only have objective meaning in light of the particular facts of each case”).
- Block v. U.S. Dept. of Educ. (In re Block), 273 B.R. 600, 607 (Bankr. W.D. Mo. 2002).
- Nixon, 453 B.R. at 330.
- In re Afflitto, 273 B.R. 162, 170 (Bankr. W.D. Tenn. 2001).
- In re Hornsby, 144 F.3d 433, 438 (6th Cir. 1998).
- Nixon, 453 B.R. at 327.
- Id. at 327.
- Id. at 330.
- Tirch v. Pa. Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677, 681 (6th Cir. 2005) (ruling that where a woman claims she cannot work because of various psychological ailments and physical ailments, prong one is not met by simply alleging these maladies; there must be some substantive evidence produced by the debtor, though the court stopped short of requiring expert evidence to prove these ailments are the reason she cannot work).
- In re Barrett, 487 F.3d at 359.
- Morrow v. U.S. Dept. Educ. (In re Morrow), 366 B.R. 774 (Bankr. N.D. Ohio. 2007).
- Id. at 779.
- In re Morrow, 366 B.R. at 779. See also Grant v. U.S. Dept. of Educ. (In re Grant), 398 B.R. 205 (Bankr. N.D. Ohio. 2008) (holding that, where a woman who has had multiple back surgeries and is limited in daily activities but has admitted she can work as long as she does no heavy lifting, her condition does not impede upon her long-term earning power so to satisfy prong two of Brunner).
- In re Barrett, 487 F.3d 353 (6th Cir. 2007).
- Id. at 356.
- Id. at 358.
- Id. at 360.
- Id. at 361 and 363.
- Id. at 362 (citation omitted).
- (In re Wallace), 443 B.R. 781 (Bankr. S.D. Ohio 2010).
- In re Wallace, 443 B.R. at 790.
- Id. (citing Wilkinson Bell v. Educ. Credit Mgmt. Corp. (In re Wilkinson Bell), 2007 WL 1021969 at *3 (Bankr. C.D. Ill. Apr. 2, 2007) (taking judicial notice of debtor’s blindness and finding this satisfies prong two of Brunner); but Cf. Reed v. SLM Corp. (In re Reed), 2005 WL 1398479 at *4 (Bankr. D. Vt. June 13, 2005) (taking judicial notice the debtor is employed; the blind debtor worked as a Wal-Mart greeter)).
- (In re Rice), 78 F.3d 1144 (6th Cir. 1996).
- Id. at 1150–1151 (noting where student loans comprised the bulk of the debtor’s indebtedness, there is a strong indicator that discharge of loans is the motivating factor behind the petition for bankruptcy); See In re Wallace, 443 B.R. at 791 (noting that “[F]ailure to make a payment does not prevent a finding of good faith where a debtor has never had the resources to make a payment,” and noting that there is no bright-line percentage in the law or the statute indicating whether the student loan debt is a motivating factor for bankruptcy)(citation omitted).
- Cheesman v. Tenn Student Assistance Corp. (In re Cheesman), 25 F.3d 356, 360 (6th Cir. 1994).
- In re Barrett, 487 F.3d at 365.
- Id.; See also In re Nixon, 453 B.R. at 334 (noting that either attempting to obtain or actually obtaining deferments or forebearances is relevant to the good faith analysis.).
- The Income Contingent Repayment Plan (“ICRP”) is a program run by the federal government where the original lenders and guarantors are repaid the loan amount by the ICRP, and the debtor in turn repays the ICRP a reduced amount of the original loan debt for up to twenty-five years; after that time any unpaid portion of the debt is discharged. In re Tirch, 409 F.3d 677, 680.
- In re Barrett, 487 F.3d at 364.
- Id.; In re Nixon, 453 B.R. at 335 (holding that, if the debtor enrolled in the program, their payments including interest would substantially exceed the amount previously loaned, resulting in a large tax burden).
- Cheesman v. Tenn. Student Assistance Corp. (In re Cheesman), 25 F.3d 356 (6th Cir. 1994).
- In re Hornsby, 144 F.3d 433, 440 (6th Cir. 1998).
- Id. at 440.
- Id. at 439.
- Miller v. Penn. Higher Educ. Assistance Agency (In re Miller), 377 F.3d 616, 624 (6th Cir. 2004).
- In re Cheesman, 25 F.3d at 361.
- In re Wallace, 443 B.R. at 794.
- Section 105(a) of the bankruptcy code empowers a bankruptcy court to issue any order, process or judgment necessary to carry out the provisions of the bankruptcy code.
CHANDLER HARRIS is a third-year law student at the University of Memphis Cecil C. Humphreys School of Law. He is a native of Nashville and a graduate of Auburn University with a degree in economics. He would like to thank the Hon. David S. Kennedy, chief judge of the Western District of Tennessee United States Bankruptcy Courts, and Adam Langley for their advice and guidance on the research and drafting of this article.