Since 2015 Kristin Price has been fighting to have her federal student loans discharged in bankruptcy. On June 23, 2017 a bankruptcy court ruled her loans were discharged. The U.S. Department of Education didn’t like that ruling and has appealed.

But it is the lengthy written opinion by Chief Bankruptcy Judge Eric Frank that I find so interesting in his ruling the loans should be discharged.

In this case Price was facing “a marital separation (which will lead to a divorce), which has left her as the sole custodian of three (3) young children, with reduced income for her family’s support.”

Price was in a standard ten-year repayment plan and had seven years left. She opted to not enroll in an Income Driven Repayment program and during the remainder of her loan repayment period her income was only going to provide for a minimal standard of living while she cared for her children.

It appears an issue in contention was if Price should be forced to enroll in an Income Driven Repayment plan which would extend out her repayment or her situation should be evaluated within the remaining seven year time allowed on her current payment plan.

This raised an interesting issue for the Judge who determined the ruling of undue hardship should be considered for the remaining time left of the loan and not decades out into the future.

Price was able to settle her private student loans with Chase Bank and will not be required to make payments to Chase on those loans.

The Bruner Test is the most prominent test used to determine if federal student loans are eligible for discharge in bankruptcy.

Under the first prong of Brunner, the court must examine the debtor’s current financial condition to see if payment of the loans would cause his standard of living to fall below that minimally necessary. [S]atisfying this prong requires more than a showing of tight finances. The second prong of the Brunner test requires the debtor to prove that there are additional circumstances that indicate that [the] state of affairs is likely to persist for a significant portion of the repayment period of the student loans. To this end . . . a student loan may not be discharged based simply on a present inability to fulfill [the] financial commitment. The third prong of Brunner requires an examination of the debtor’s good faith. This inquiry is to be guided by the understanding that undue hardship encompasses a notion that the debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond his reasonable control. All three elements must be satisfied individually before a discharge can be granted. If any one of the Brunner requirements is not satisfied, the bankruptcy court’s inquiry must end there, with a finding of no dischargeability.

In this case there was no dispute the Debtor met the first and third prongs of the Bruner Test. It was only the second prong that was under dispute.

The second prong has two (2) elements:

(1) that the debtor’s present financial difficulties are likely to continue and not improve; and

(2) the duration of the debtor’s financial hardship will continue “for a significant portion of the repayment period of the student loans.”

Even in the original Bruner case the Court found it difficult to forecast future income and expenses.

Predicting the future, however, is never so easy. Minimum necessary future expenses may be ascertained with some precision from an extrapolation of present needs, but unpredictable changes in circumstances such as illness, marriage, or childbirth may quickly wreak havoc with such a budget. Even more problematic is the calculation of future income. It is the nature of §523(a)(8)(B) applications that they are made by individuals who have only recently ended their education. Their earning potential is substantially untested, and because they are inexperienced they are in all likelihood at the nadir of their earning power. They may, like appellee, have had difficulty in securing employment immediately after graduation. – In re Brunner, 46 B.R. 752, 754-55 (S.D.N.Y. 1985).

The Judge noted in this case that even person has unique circumstances and truly can’t be judged by a checklist alone, like the Bruner Test. The Judge said, “In this case, the Debtor does not fit into the most common profile of a debtor entitled to a student loan discharge under §523(a)(8). She is young and healthy; she completed the schooling for which she incurred her student loans and obtained a professional license in her field; she is employed, albeit only part-time. All of these factors suggest that her circumstances could improve.

On the other hand, she has three (3) young children and extensive childcare costs. The childcare costs will rise, at least in the short run, if she works more hours. Given the age of her children, these childcare costs can be expected to continue for a number of years. As the children get older and childcare expenses diminish, one can expect that those costs will be replaced commensurately with other child rearing expenses.20 Although employment within the Debtor’s field would result in increased net income in the near future, there are no additional hours available for her to work in her field. Nor can she easily expand her licensing credentials to open up other employment opportunities within her field as that would require the investment of additional time and expense for additional schooling. Furthermore, employment outside her field would result in only a marginal increase in net monthly income.”

The Repayment Period Matters

In this case the Court determined the length of the repayment plan was very important. While the Debtor stated she had seven years remaining on her payment plan and her financial situation would not change for the better during that time the Department of Education wanted her to get on their 25-year repayment plan instead.

In the Opinion the Judge enters into a historical discussion of the Bruner Test which puts the length of the repayment plan in a different light than many assume today.

“In 1987, when Brunner was decided, a student loan could be discharged upon a showing that the loan was in pay status for five (5) years prior to the bankruptcy or that repayment would impose an undue hardship on the debtor and the debtor’s dependents. See Pub. L. No. 96-56, §3, 93 Stat. 387, 387 (Aug. 14, 1979). Thus, at the time, student loan debt was dischargeable simply by virtue of the passage of the requisite time period. (I will refer to the five (5) year provision of §523(a)(8) as providing for a “temporal discharge”).

Also during that time, undue hardship cases arose only if a debtor sought to discharge student loan debt that was in pay status for less than five (5) years. Thus, the “undue hardship” cases coming before the bankruptcy courts in the age of Brunner involved debtors who had only recently graduated and sought to discharge student loan indebtedness after only a brief period of economic difficulty (and, in some cases, without having made any effort to repay the indebtedness). See Roth, 490 B.R. at 921 (Pappas, J., concurring). Indeed, the district court in Brunner described the test it formulated to apply to debtors seeking to “obtain[ ] a discharge of student loan in bankruptcy prior to five years after first become due.” Brunner, 46 B.R. at 756. Eight (8) years later, when Brunner was adopted in this Circuit by Faish, the architecture of student loan discharge was essentially the same, the only difference being that the right to a temporal discharge required a waiting period of seven (7) years, rather than five (5) years.”

But in this case the key factor is if the Debtor’s financial hardship will continue for a significant portion of the repayment period. The Debtor and Department of Education seem to be at an impasse as to what that period is. Is it the contractual repayment period or the new repayment period by enrolling in a new payment plan that would extend the loan out up to 25 years?

Judge Frank found “the need to preserve the integrity of the judicial process favors the use of the contractual loan term rather than a lengthy extended loan term. Court cases should be decided in a clear and comprehensible way. Those analyzing a debtor’s future financial situation under the second prong of Brunner “should base their estimation of a debtor’s prospects on specific articulable facts, not unfounded optimism.”

“Use of a twenty (20) or twenty-five (25) year extended term as the repayment period under Brunner arguably requires that the court predict what the debtor’s circumstances will be ten (10) or fifteen (15) years into the future. Jn many cases, such determinations will be nothing more than mere guesswork, without any reasonable degree of certitude. Such a failure to engage in a grounded, realistic analysis not only creates the danger of an overly-strict application of Brunner, but also raises legitimate concerns about both the integrity of the judicial decision making process, as well as the public’s perception of the process.”

Even the Department of Education loan expert appears to have offered an opinion during the trial about the “considerable explanation about the negative consequences of the REPAYE program for people like the Debtor.”

The Judge learned, “Because REPAYE requires loan consolidation, it results in the capitalization of accrued interest. Capitalization means that individuals on REP A YE are now paying interest on interest. If the REPAYE-borrower’s income does not improve within a few years, the loan can reach a kind of “escape velocity,” in which a borrower’s meager income will never be applied to the original principal and the loan balance will only grow for the next several decades. Ultimately, the loan expert testified unequivocally that the REPAYE program was ill-suited for this Debtor and that he would recommend against her entry into REPAYE. (Id. at 11: 16). The DOE asks this court to consider the REP A YE repayment term irrespective of these adverse financial consequences (and regardless of whether the Debtor is actually eligible for the program at this moment).”

So the Department of Education expert advises the extended income based repayment program would be ill advised while the government lawyers argue that repayment time period should be considered regardless.

Here is where Judge Frank bravely made the point the Court would be inappropriately making financial decision for the Debtor if they bought the argument of the U.S. Attorney. The Judge said, “By utilizing a longer repayment term, the bankruptcy court would be making the Debtor’s financial decisions for her, treating her as though she is actually on this repayment plan, while she is still contractually obligated to make much larger monthly payments. And, this court would not only be making sensitive financial decisions for the Debtor, but it would also be making decisions which were actively harmful to her financial situation, as the DOE’s witness testified. Even invoking the IBR plan, which does not involve capitalization of interest, invites perverse incentives. If I consider the twenty (20) year IBR term, and find that the Debtor has not met her burden of proof, she then will be obligated to repay her loan at its contract terms, with a monthly payment she cannot afford or be subject to DOE collection efforts. As a result, the court would almost be compelling the Debtor to enter into the IBR program, a program that is intended to be voluntary.”

“In my judgment, the arguments in favor of using the actual contract term outweigh the contrary arguments in this case. Therefore, I hold that notwithstanding a debtor’s potential eligibility for an extended term student loan repayment program, if a debtor chose not to enter such a program in good faith, the repayment period under the second Brunner prong is the remaining contractual term of the debtor’s loan.” – Judge Frank

The Judge attempts to provide additional clarification in four points to help readers understand his logic in this case. He says, “To some readers, parts of the above analysis may appear unorthodox and my determination that the Debtor’s student loan debt is dischargeable may seem counterintuitive. After all, the debt is owed by a young, healthy individual who completed her education, licensed for employment in the healthcare field and presently working only part-time. Therefore, I will briefly supplement this already lengthy opinion to provide some further perspective on this case. In doing so, I will make four ( 4) points.

First, unlike some courts and commentators, I do not suggest that the Brunner test needs to be replaced. The three prong test is fine; it provides courts with the analytic tools needed to separate debtors who deserve the undue hardship discharge of their student loans from those who do not. The first two (2) prongs appropriately focus on the debtor’s financial circumstances and future prospects. Consistent with case law under other sections of the Bankruptcy Code, the third prong’s importation of a good faith requirement into the undue hardship standard provides courts with a means to prevent inequitable results when a litigant somehow literally (and superficially) appears to satisfy the statutory standards for relief when, in actuality, granting such relief is inconsistent with the fundamental bankruptcy policy goals.

Second, I suggest only that courts take a fresh look at the manner in which Brunner is applied. Many courts treat §523(a)(8) undue hardship cases as “all or nothing” propositions: either the debtor has some eventual prospect of a meaningful financial recovery sufficient to repay the student loan indebtedness or not. If such an eventual prospect exists, for many courts, the debt is conclusively nondischargeable based on the second prong of Brunner.

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But, this case illustrates that §523(a)(8), is not an “all or nothing.” The Debtor is an individual who, based on her age, education and skills, has a reasonable prospect of improving her financial situation at some eventual point in the future. If “certainty of hopelessness” is the true §523(a)(8) litmus test, the outcome in this case is incorrect. However, in this opinion, I have attempted to demonstrate that §523(a)(8) and the Brunner test were never intended to bar dischargeability based on an unlimited forecast into a debtor’s future. The real question is how long must the debtor’s circumstances appear unlikely to improve before the bankruptcy system gives the debtor relief from a burdensome debt. Particularly in light of the existence of extended term loan repayment programs, that can be a difficult question to answer and I have suggested that it might require determination on a case-by-case basis.

Here, I determined that the appropriate time period to be considered is the existing loan contract term, not the potentially lengthier extended repayment plan term, because the Debtor elected not to enter such a program in good faith. The outcome may well be different in other cases in which the extended loan repayment programs present a more attractive option, or for other appropriate reasons.

Third, both conclusions critical to the outcome in this case (that the Brunner second prong repayment period was relatively short and that the Debtor’s situation was unlikely to improve within that time period) were largely the product of the parties’ litigation choices and the meager record presented to the court. The decisive factor was the application of the burden of proof and the determination that the Debtor met that burden by a preponderance of the evidence.

Using the contract term as the repayment period turned on the Debtor’s good faith in choosing not to participate in an extended loan repayment program. The Debtor’s explanation for that decision was reasonable and the DOE did not dispute the issue. Furthermore, the DOE did not develop the record regarding the potential for a particularized application of its extended loan repayment standards for an individual, like the Debtor, whose tax return showed an adjusted gross income that was artificial, in light of her marital separation. Nor did the DOE flesh out the details of the likely repayment terms of a more particularized application of its repayment standards to someone in the Debtor’s position. Perhaps a more fulsome record would have made it more appropriate to evaluate the Debtor’s prospects over a longer repayment period.

Similarly, the Debtor presented unrebutted evidence supporting her position that, for reasons beyond her control, she could not increase her income from employment in her professional field and that, therefore, her present circumstances were likely to persist. Undoubtedly, if the Debtor worked full-time in her field, she would have sufficient income to repay her student loan without undue hardship. Or, if she lacked an acceptable explanation for not working full-time, the additional income could be attributed to her, with the same outcome, i.e., a determination of nondischargeability The Debtor’s evidence explaining her inability to work fulltime may not have been overwhelming (and arguably, was a bit thin), but it was certainly credible and sufficient to support her theory under the second prong of Brunner; it made out a prima facie case. In response, the DOE chose to present no evidence. Some concrete evidence regarding the labor market that rebutted the Debtor’s testimony easily could have affected the outcome. See Roach, 288 B.R. at 445.

Finally, I suggest that critical analysis of this decision should separate the law from the application of the law. In this opinion, I advance the legal proposition that proper application of the Brunner test requires adherence to the temporal limitations inherent in the test. Separately, but with that principle in mind, I applied the Brunner test to the facts of this case. Those two (2) aspects of the opinion are distinct and should be evaluated separately.”

I invite you to read the Opinion in two parts, here and here.