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Posted by: Mary Ausbrooks & Samuel Henninger on Jul 22, 2019

Journal Issue Date: Aug 2019

Journal Name: Vol 55 No 8

Undue Hardship Is a Difficult Standard to Meet in Tennessee

Student loans weigh heavy on many. Borrowers owe nearly $30,000 on average, and Americans collectively owe $1.5 trillion in student loan debt.1 For some borrowers, bankruptcy may offer relief. But for most in Tennessee, bankruptcy is currently not a viable option to help borrowers rid themselves of burdensome student loan debt.

Discharge in Bankruptcy

The most common bankruptcy filings are under chapter 7 or chapter 13. One of the most valuable aspects of bankruptcy is the discharge. After a debtor fulfills the requirements under chapter 7 or chapter 13, she may receive a discharge. In short, if a debt is discharged, a debtor will no longer have a legal obligation to repay it.

Some of the most common forms of dischargeable debt arise from credit cards and medical bills. For example, after a debtor receives a discharge on her credit card debt, the bankruptcy court enforces an injunction against the credit card company from collecting on that debt. If the company violates the discharge injunction, the bankruptcy court may sanction the company by placing it in civil contempt.

But not all debts are dischargeable. Section 523 of the Bankruptcy Code lists 19 categories of debt that are not dischargeable — or nondischargeable. Some forms of nondischargeable debt arise from money obtained by fraud, from a domestic support obligation, or from willful and malicious injury by the debtor. One of these categories, described in section 523(a)(8), covers debt that arises from student loans. But this category contains a qualification not found in any of the other eighteen categories: the debt may be dischargeable if “excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor’s dependents.”2

Student Loans in Bankruptcy

Before 1976, federal law never prohibited the discharge of student loans.3 With the Bankruptcy Reform Act of 1978, Congress codified section 523(a)(8) of the Bankruptcy Code. In 1985, the Southern District of New York decided one of the most important cases involving section 523(a)(8): Brunner v. New York State Higher Education Services Corp. (In re Brunner), 46 B.R. 752 (S.D.N.Y. 1985). This case is so important because it developed a test for undue hardship that has since been adopted by most of the courts of appeals.

In this case, the debtor filed for personal bankruptcy about seven months after receiving a master’s degree in social work. She sought to receive a discharge of about $9,000 in student loans. At a hearing before the bankruptcy court, she explained that her poor financial circumstances and unsuccessful efforts at finding a job following graduation warranted a discharge. The bankruptcy court issued a decision discharging Brunner’s student loans. The district court, however, reversed. In doing so, the district court adopted the following standard for undue hardship (a standard that Brunner failed to meet):
[T]he district court adopted a standard for “undue hardship” requiring a three-part showing: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) 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 (3) that the debtor has made good faith efforts to repay the loans.4

Law in Tennessee

In 2005, the Sixth Circuit joined other circuits in adopting the Brunner test for undue hardship.5 In that case, a 48-year-old pastor who was married with three children sought a discharge of about $40,000 in student loans. His family of five had annual income of less than $10,000 for two years before filing for bankruptcy. After applying the test, the Sixth Circuit found that the pastor failed to qualify for undue-hardship discharge of his student loans. The court determined that his education (bachelor’s and master’s degrees) and experience (salesman and audio engineer) obligated him to seek higher-paying work before claiming undue hardship. In brief, undue hardship is a difficult standard to meet in Tennessee.

Two more cases before the Sixth Circuit help to illustrate this principle. In the first case, decided shortly after the court adopted the Brunner test, the debtor sought a discharge of about $84,000 in student loans.6 The basis for her undue hardship was her loss of appetite, which she claimed made it impossible for her to return to work. The debtor contended that she lost her sense of taste because of the anesthetics that she received during colorectal surgery. Because the evidence failed to demonstrate that the debtor could not return to work, the court reversed the bankruptcy court’s partial discharge. In the second case, the debtor sought a discharge of about $121,000.7 The debtor had an annual salary of $26,000, and her husband made $42,000 per year. The court noted that she paid for private elementary school tuition and bought a new minivan (with monthly payments of $420) after filing for bankruptcy. Even though the debtor was facing maternity leave and the added cost of a growing family, the court found that the debtor failed to meet the undue-hardship standard.

Since the Sixth Circuit adopted the Brunner test, it has affirmed only one undue-hardship discharge of student loans. This occurred in the In re Barrett case.8 Debtor Thomas Barrett owed nearly $95,000 in student loans. Before filing for bankruptcy, his extensive medical issues included the following diagnoses: mononucleosis, pars planitis (a disease of the retina, which is also an autoimmune condition) and Hodgkin’s disease at the highest level (stage IVB). After filing for bankruptcy, Barrett was diagnosed with avascular necrosis, which causes a person’s bones to die because of limited blood supply. At trial before the bankruptcy court, Barrett testified about his extensive pain medication: 40 milligrams of OxyContin three times per day, 10 milligrams of Oxycodone four times per day, and two milligrams of hydromorphone four times per day. Because of the pain in his right shoulder, Barrett testified, he was unable to hold a coffee cup with his right hand.

Recent reported decisions at the bankruptcy appellate panel (BAP) and bankruptcy court level further establish how rare the undue-hardship discharge is in this jurisdiction. In a 2018 case before the BAP of the Sixth Circuit (a level between the bankruptcy court and appellate court), a parolee sought to discharge student loans that were used to obtain an architectural drafting certificate.9 The court concluded that remaining on parole throughout a repayment period was insufficient for an undue-hardship discharge. A few years before that case, a bankruptcy court in Tennessee decided an issue of undue hardship with a debtor who owed about $14,000 in student loans and was about 30 credits shy of graduating with a bachelor’s degree.10 Even though the debtor reported income of about $15,000 the year he filed for bankruptcy, the court refused to grant him an undue-hardship discharge. The 25-year-old debtor’s proven potential to earn much more money later in his life, the court concluded, demonstrated a lack of the requisite hopelessness to qualify for an undue-hardship discharge.

In sum, if you seek to discharge student loans in bankruptcy in Tennessee, you must make an exceedingly compelling case to prevail. Short of an extensive history of medical ailments to the point where you can no longer hold a coffee cup without immense pain, you are unlikely to make a viable case for an undue-hardship discharge of student loans.

Recent Developments Around the Country

A bankruptcy court in Colorado recently found that private loans that provide an educational benefit are not covered by section 523(a)(8).11 In other words, a debtor need not meet the high burden of proving undue hardship to discharge private student loans. Citing bankruptcy decisions from California, Maryland, New York, Pennsylvania and Texas, the court referred to this as the “trending” view. First, the court relied on a plain reading of the provision to conclude that a debtor with private loans for educational purposes — unlike a debtor with scholarships and stipends — may discharge those private loans without demonstrating undue hardship. Second, the court relied on legislative history to support its conclusion. Because the provision was enacted to guard against the contemplated insolvency of government education loan programs, the court contended that the provision was not intended to cover private loans for educational benefit.

To find that section 523(a)(8) does not cover private loans that provide an educational benefit, the court principally relied on a recent decision from a bankruptcy court in the Eastern District of New York. In that case, the debtor sought to discharge a $15,000 bar loan (CitiAssist Bar Exam Loan) from Citibank.12 As in the above decision from Colorado, the debtor sought to discharge the debt not on the basis that it imposed an undue hardship but on the basis that it did not fall under the statute’s definition of “educational benefit.” The court concluded that an educational benefit under the statute must refer to something similar to a scholarship or a stipend. Because the words “scholarship” and “stipend” are listed with the phrase “educational benefit” in the specific prong of the statute, the court relied on a canon of statutory construction to find that each word presumptively has a similar reading. And as the above Colorado court did, this court found that the legislative history supported its conclusion. More bankruptcy courts around the country may soon adopt this “trending” view of private student loans.

Another approach that debtors might consider is to seek an undue-hardship discharge on the student loan’s interest. In a recent decision from a bankruptcy court in Kansas, which was subsequently affirmed by the district court, the debtor sought a discharge of student loans that she took to attend community college.13 She originally borrowed about $17,000 about 30 years ago. Even though she paid nearly $15,000 toward the loan, her amount owed had risen to about $67,000 by the time of the decision. Everything she had paid went toward paying down the interest on the loan. Because the debtor had no realistic prospects of earning significantly more money, the court found that paying the accrued interest would be impossible for the debtor. The court concluded that requiring the debtor to pay the remaining interest on the loan would impose an undue discharge. In short, the court discharged the interest but not the principal.

In May, the United States Congress got involved too. A bipartisan group of senators and representatives introduced the Student Borrower Bankruptcy Relief Act of 2019. Several presidential candidates co-sponsored the bill, including Kamala Harris, Amy Klobuchar, Bernie Sanders and Elizabeth Warren. The bill seeks to do one thing: strike paragraph (8) from section 523(a). In other words, the bill would eliminate the special exception to discharge that the Bankruptcy Code provides for student loans. If the bill is enacted, debtors in bankruptcy would be able to discharge their student loans in the same way that they discharge other unsecured loans such as credit card debt. Debtors would no longer be required to demonstrate that paying their student loans would impose an undue hardship on them and their dependents. The above Brunner test and case law interpreting it would become obsolete. If the bill passes, debtors would be able to discharge student loan debt much more easily.

Earlier this year as well, an influential commission recommended its own changes to the way that student loans are dealt with in bankruptcy. The commission was put together by the American Bankruptcy Institute, one of the most prominent associations of bankruptcy professionals in the nation. The commission’s 274-page report addressed a wide variety of consumer bankruptcy issues, from the racial disparity in chapter 13 filings in cities such as Chicago and Memphis to the redaction of mental health information in bankruptcy court filings. But the very first issue addressed by the commission was student loans. In contrast to the above bill’s simple deletion of section 523(a)(8), the commission’s suggested changes to the Bankruptcy Code were more measured. Instead of entirely deleting the subsection and its undue-hardship standard, the commission revised it. Indeed, under the commission’s proposed version of section 523(a)(8), the undue-discharge standard would only apply to student loans made, insured, or guaranteed by a governmental unit (not private loans).

Conclusion

Student loan debt among Americans has more than tripled since the Great Recession. In 2006, outstanding student loan debt was less than $500 billion. Today, it has risen to more than $1.5 trillion. Because of the special treatment that student loans receive under the Bankruptcy Code, debtors must overcome a substantial burden to discharge them.

The undue-hardship standard leaves few debtors across the country with the ability to discharge their student loans. Case law suggests that, in Tennessee and across the Sixth Circuit, a debtor will struggle to meet the undue-hardship standard unless she has an extensive history of medical issues and lives in a near-permanent state of intense pain. Few debtors qualify. But recent bankruptcy decisions across the country, proposed federal legislation, and an influential commission’s report provide hope that more debtors may be able to discharge their student loans in the future.

 

MARY BETH AUSBROOKS practices in Nashville and is the sole owner in the consumer debtor firm of Rothschild & Ausbrooks PLLC.  She is a board certified Consumer Bankruptcy Specialist and has been certified as such by the American Board of Certification. She has served as the Tennessee state chair for the National Association of Consumer Bankruptcy Attorneys and as a member of its board of directors. She is also a member of the board of directors for the American Board of Certification and serves as chair of the Standards Committee. Ausbrooks has served as president, vice president and secretary for the Middle Tennessee Association of Consumer Bankruptcy Attorneys. A graduate of the Cecil C. Humphreys School of Law, she is admitted to practice in the District Court for the Middle District of Tennessee, the Sixth Circuit Court of Appeals and the United States Supreme Court.
 

 

SAM HENNINGER is a term law clerk for Chief United States Bankruptcy Judge Marcia Phillips Parsons of the Eastern District of Tennessee. He is a recent graduate of the University of Tennessee College of Law. Henninger will join Waller Lansden Dortch & Davis LLP as an associate in the finance and restructuring group following his clerkship.

The views stated in this article are those of the authors alone and do not represent those of Chief Judge Marcia Phillips Parsons or the United States Bankruptcy Court for the Eastern District of Tennessee.

 

 

 


NOTES

1. Zack Friedman, “Student Loan Debt Statistics in 2019: A $1.5 Trillion Crisis,” Forbes (Feb. 25, 2019, 8:32 a.m.), https://www.forbes.com/sites/zackfriedman/2019/02/25/
student-loan-debt-statistics- 2019/#739c9a3f133f.
2. 11 U.S.C. § 523(a)(8) (2012).
3. Johnson v. Mo. Baptist Coll. (In re Johnson), 218 B.R. 449, 451–54 (B.A.P. 8th Cir.1998) (providing a history of 11 U.S.C. § 523(a)(8)).
4. Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).
5. Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005).
6. Tirch v. Penn. Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677, 679 (6th Cir. 2005).
7. Fields v. Sallie Mae Servs. Corp. (In re Fields), 286 F. App’x 246, 247 (6th Cir. 2007).
8. Barrett v. Educ. Credit Mgmt. Corp. (In re Barrett), 487 F.3d 353, 366 (6th Cir. 2007).
9. Chenault v. Great Lakes Higher Educ. Corp. (In re Chenault), 586 B.R. 414, 418 (B.A.P. 6th Cir. 2018).
10. Hubbard v. U.S. Dep’t of Educ. (In re Hubbard), 529 B.R. 250, 252 (Bankr. E.D. Tenn. 2015).
11. McDaniel v. Navient Solutions LLC (In re McDaniel), 590 B.R. 537, 549 (Bankr. D. Colo. 2018).
12. Campbell v. Citibank N.A. (In re Campbell), 547 B.R. 49, 52 (Bankr. E.D.N.Y. 2016).
13. Metz v. Navient Educ. Loan Corp. (In re Metz), 589 B.R. 750, 753–54 (Bankr. D. Kan. 2018), aff’d sub nom. Educ. Credit Mgmt. Corp. v. Metz, No. 18-1281-JWB, 2019WL 1953119 (D. Kan. May 2, 2019).