Teacher Can't Discharge Student Loans in Bankruptcy

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By Diane Davis

May 3 — A single mother with four college degrees, including a Ph.D. in special education, and two teenaged boys can't discharge in bankruptcy $112,000 in student loan debt because she failed to show that there was a “certainty of hopelessness” that she could repay the loans, a district court in Alabama held May 2.

Chief Judge W. Keith Watkins of the U.S. District Court for the Middle District of Alabama reversed the decision of the bankruptcy court and entered judgment in favor of Educational Credit Management Corporation (ECMC).

Although debtor Alexandra E. Acosta-Conniff finds herself in “undesirable financial difficulties, she ultimately must bear the consequences of her decision to obtain loans in order to pursue her multiple educational goals,” the court said.

According to the court, she failed to show that her purported “inability to pay is likely to continue for a significant time, such that there is a certainty of hopelessness that [she] will be able to repay the loans within the repayment period.”

The court found that the debtor failed to meet the second element of the three-part test established in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), and adopted by the Eleventh Circuit to establish undue hardship. The bankruptcy court incorrectly ruled that the debtor had met her burden of proof, the court concluded.

Brunner Test

While student loans are presumptively nondischargeable in bankruptcy, Bankruptcy Code Section 523(a)(8) contains a narrow exception that if the student loans would “impose an undue hardship on the debtor and the debtor's dependents,” they may be discharged. The leading test for determining the existence of “undue hardship” is found in Brunner, the court said.

According to , pt. II, ch. 63 (D. Michael Lynn et al. eds., 2016), a debtor must make a three-part showing to show undue hardship:

  • (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.


Reached Top of Pay Scale

The 44-year old Alabama public school teacher earned four degrees from Auburn University: a bachelor of science in chemistry, a master's degree in learning disabilities, a master's degree in educational leadership, and a Ph.D. in special education. She is currently at the top of the pay scale for a position with her school district. For most of her career, the debtor has been a special education teacher, but due to her diabetes and morbid obesity, she took a lateral position as a secondary science teacher because the work is less physical. The debtor hasn't looked for employment outside her school district because she would lose her seniority and tenure if she went to another school district.

The debtor has been able to earn extra income on occasion but the additional costs for gas, childcare, and eating out have frequently been more than the additional income.

The debtor has paid more than $9,000 toward her loans, but they have been in deferral for several years. She hasn't applied for the Income-Contingent Repayment Plan (ICRP), which lowers a debtor's payment in response to hardship based upon a formula. ECMC testified at trial that under ICRP, her monthly payments would be $346 for 120 months, at which point the remainder would be forgiven.

Student Loan Debt Discharged

The bankruptcy court determined that the debtor's monthly payment on her $112,000 student loan debt would be $915 a month for 15 years.

The bankruptcy court found that the debtor met all three elements of the Brunner test, and discharged the debtor's student loan debt.

ECMC appealed to the district court arguing that the debtor failed to meet her burden under the second prong of the Brunner test.

No ‘Certainty of Hopelessness.'

Under the second prong, the debtor must show that additional circumstances make this state of affairs likely to persist. This element, which is the heart of the Brunner test, is predictive and forward looking, according to , and some courts read it to “require not the mere inability to meet one's financial obligations at present, but instead a ‘certainty of hopelessness.'”

The fact that a debtor has a low-paying job without much upside earning potential isn't enough to satisfy this second prong, the district court said, citing Matthews-Hamad v. Educational Credit Management Corp. (In re Matthews-Hamad), 377 B.R. 415 (Bankr. M.D. Fla. 2007). The court also noted that the debtor's decision to remain in her own school district is one of her own choice. The debtor has been able to maintain steady full-time employment, earning nearly $60,000 annually at the time of her adversary proceeding, and there is no indication that she won't retain her tenured job with potential for salary increases, the court said. In addition, the debtor holds multiple marketable degrees, the court said.

David Edwin Rains, Kristofor David Sodergren, and Robert Allen Morgan, Rosen Harwood, PA, Tuscaloosa, Ala.; David Chip Schwartz, Zarzaur & Cunningham PC, Birmingham, Ala., represented appellant ECMC, also known as Educational Credit Management Corporation; Appellee Alexandra Elizabeth Acosta-Conniff, represented herself, pro se, Eufaula, Ala.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com