Court Must Revisit Whether Debtors Can Discharge Student Loans

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By Diane Davis

March 4 — Student loan guarantor Educational Credit Management Corporation (ECMC) is getting another chance in bankruptcy court to show that the debtors' discharge of their student loans in bankruptcy was improper, a federal district court in Kansas held March 1.

Judge Julie A. Robinson of the U.S. District Court for the District of Kansas vacated the bankruptcy court's decision, concluding that the case should be remanded for further proceedings to make more complete findings under the second and third factors of the Brunner test and the impact of the Income Based Repayment plan on the bankruptcy court's good faith analysis. Since courts are divided on this issue, the outcome for the debtors' student loan debt could go either way, depending on the bankruptcy court's findings.

The Tenth Circuit (where appeals from the District of Kansas are made) has joined eight other circuits in adopting the three-part test set forth in Brunner v. New York State of Higher Education Services, 831 F.2d 395 (2d Cir. 1987), to determine what constitutes “undue hardship” for purposes of determining whether a student loan debt may be discharged in bankruptcy under Bankruptcy Code Section 523(a)(8). The three-part test in Brunner includes:

“(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.”


ECMC contended that the bankruptcy court's decision to discharge debtors' George and Melanie Johnson's student loan debt was improper because the debtors didn't meet the second and third prongs under Brunner. The bankruptcy court determined that the repayment period of the loan had already expired, which was not supported by the evidence.

The district court remanded the case for further analysis and clarification on whether George's unemployment is temporary, his future earning potential, and the correct repayment period of the loan.

The court also remanded the case to determine whether the debtors had made a good faith effort to repay as required under the third prong of the Brunner test. The court wanted further clarification on the impact of the Income Based Repayment plan (IBR) on the bankruptcy court's good faith analysis. Courts are divided on the question of whether a debtor must participate in an alternative repayment program in order to establish good faith, according to Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 63 (D. Michael Lynn et al. eds., 2016).

Following In re Alderete, 412 F.3d 1200 (10th Cir. 2005), the court noted that courts in the Tenth Circuit consider a debtor's willingness to consolidate his loan under the William D. Ford Federal District Student Loan Programs Income Contingent Plan (ICRP) or IBR an important factor in determining whether a debtor has made a good faith effort to repay a student loan debt. As a result, the outcome for the debtors' student loan debt discharge could go either way, depending on the bankruptcy court's findings on remand.

“[I]n view of the heavily fact-dependent nature of the undue hardship inquiry,” the court said it was important to vacate the bankruptcy court's judgment and remand the case to make more complete findings.

Debtors Want ‘Fresh Start,' Not IBR Plan

Debtor George has a B.A. in sociology from the University of St. Mary's, and debtor Melanie left school one class short of earning her degree in biology from the University of California-Davis. They have three children, ages 11, 8, and 5. Melanie works for the Veteran's Administration as a billing supervisor and makes $40,000 per year. In 2012, George was laid off from his position as a youth counselor at The Guidance Center where he made $27,000 a year.

In 2011, they filed their Chapter 7 bankruptcy petition in which their nonexempt assets are liquidated and the proceeds are distributed to creditors. They listed $73,000 in student loan debt on their bankruptcy schedules. During the eight years the loan was in repayment, the debtors paid $2,440.

The debtors brought an adversary proceeding, seeking to discharge the student loans.

Court Finds ‘Herculean Task.'

The bankruptcy court noted that based on the debtors' adjusted gross income in 2012 of $60,000, the debtors were eligible for a monthly payment of $234 paid over a 25 year period under the IBR plan. The debtors didn't pursue the IBR option because they wanted a “fresh start” with three children they would have to put through college.

The bankruptcy court discharged the debtors' student loans based on its finding that failure to discharge the student loans would impose an undue hardship on the debtors. The reality is, the court said, that “even if the Debtors' gross income were $60,000 per annum, providing for a family of five would be a Herculean task.”

More ‘Searching Inquiry' Required

ECMC challenged the bankruptcy court's finding on the second and third prongs of Brunner. The bankruptcy court found that the second prong had been satisfied because the debtors' projected monthly expenses for car payments, maintenance, and gasoline were unrealistically low and would most likely be offset by future expenses. Looking at the additional circumstances in the case, the bankruptcy court reasoned that the second prong didn't apply to the debtors because the court believed the 10-year repayment period on the loan had already expired.

The district court determined that requires a more “searching inquiry.” The bankruptcy court failed to consider whether the debtor's unemployment was an additional circumstance that was likely to persist in the future. The court also found that an accurate repayment period should be addressed and considered on remand.

Similarly, the district court found that the third prong regarding good faith needs closer scrutiny. The debtors qualified for IBR, the court said. The bankruptcy court should further clarify the impact of the IBR on the good faith analysis, the court said.

Kelly Prettner, Pro Hac Vice, ECMC, Oakdale, Minn.; N. Larry Bork, III, Goodell, Stratton, Edmonds & Palmer, LLP - Top, Topeka, Kan., represented Educational Credit Management Corporation; Debtors George A. Johnson, and Melanie J. Johnson, Leavenworth, Kan., represented themselves pro se.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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