By: Donald L Swanson
One of the human tragedies of our time is this legal opinion: Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).
Brunner creates a three-part test for discharging student loans in bankruptcy, under the “undue hardship” standard of 11 U.S.C. § 523(a)(8). Brunner has become known as the “certainty of hopelessness” test, which has been tragic for many people in hopeless financial straights.
Brunner is now before the U.S. Supreme Court on a Petition for writ of certiorari in the case of McCoy v. United States (Docket No. 20-886). Hopefully, the Supreme Court will grant certiorari, reject Brunner, and adopt a more humane discharge test for student loans.
McCoy v. United States—Facts and Rulings [Fn. 1]
As you read the following McCoy v. U.S. facts, remember that this person does NOT qualify for an “undue hardship” discharge of her student loans, based on Brunner’s “certainty of hopelessness” test.
Thelma McCoy is a 62-year-old African American woman with serious disabilities. After raising four children, she returned to school at age 43, earning a bachelor’s degree from Louisiana State University in general studies in 2004, a master’s degree in social work from the University of Houston in 2006, and a Ph.D. from the University of Texas in social work in 2014.
When she began her Ph.D. program in 2006, Ms. McCoy owed only $10,000 in student loans. She also qualified for a package of grants and scholarships that, together with her husband’s income, covered her expenses.
But over the following eight years—the time it took to complete her doctoral degree—Ms. McCoy suffered a series of hardships:
- A 2007 car accident with a drunk driver left her temporarily wheelchair bound, then her husband filed for divorce, financially destabilizing her, and two years later, she suffered first- and second-degree burns to her face;
- During such time, the University of Texas informed her that, because she was moving into the third year of her doctoral program, she would no longer receive scholarship funding—to complete her degree, Ms. McCoy would have to rely on student loans;
- In subsequent years, while pursuing a Ph.D. program, Ms. McCoy suffered from various disabilities, including memory loss, dizziness, insomnia, numbness and decreased range of motion in her left hand, loss of appetite, fatigue, chronic headaches, panic attacks, depression, and frequent feelings of hopelessness; and
- In 2016, an MRI revealed that she had a developed a degenerative back problem: discs protruding from her spine intermittently paralyzed her legs, hands, and fingers, making even simple movements—such as sitting up or typing on a computer—prohibitively painful.
Despite her physical and mental deterioration, Ms. McCoy has always sought employment—worked part-time student jobs while pursuing her degree (her program forbade full-time work), and before graduating secured a few part-time, online teaching jobs with various universities (all were months apart, paid little, and were not renewed).
After graduation, she could not find a full-time position, despite applying for 185 jobs, both inside and outside her field.
At 60 years of age and with no employment prospects in sight, Ms. McCoy filed for bankruptcy and moved to discharge her student loans. By this time, the $174,947 she borrowed to complete her degree had nearly doubled with interest.
The Bankruptcy Court denies Ms. McCoy a discharge of her student loans under Brunner, based on findings that she, (i) qualified for Income Based Repayment (a repayment plan that caps monthly payments at a percentage of income), (ii) had “recently gotten some part-time employment,” and (iii) might possibly find “better employment” in the future.
On appeal, the District Court affirms, (i) relying on Brunner, (ii) emphasizing that Ms. McCoy qualified for a periodic payment of zero dollars at the time of trial because her income was so low, and (iii) noting that a debtor must show “a total incapacity” to repay her debts in the future due to circumstances that “were not present when she applied for the loans at issue or have since been exacerbated.”
On further appeal, the Fifth Circuit affirms, holding that the District and Bankruptcy Courts applied the correct Brunner standard and did not err in concluding that Ms. McCoy could not “prove a total incapacity in the future to pay [her] debts.”
Eighth Circuit Alternative—In re Long
A more-humane alternative is espoused by the Eighth Circuit in In re Long, 322 F.3d 549 (8th Cir. 2003), as follows:
- “[W]e decline” to adopt the three-part test articulated in Brunner—instead, we adopt the less restrictive “totality-of-the-circumstances test”;
- Congress excepted student loans from discharge to prevent recent graduates, at the beginning of lucrative careers, to “escape their student loan obligation”—but Congress did not define “undue hardship,” and courts have struggled with its meaning;
- Under a totality-of-the-circumstances test, courts should consider: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case”; and
- “Simply put,” student loans should not be discharged “if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt, while still allowing for a minimal standard of living”—this requires “special consideration of the debtor’s present employment and financial situation,” including assets, expenses, and earnings (along with the prospect of future changes, positive or adverse) in the debtor’s financial position.
Today’s student loan problem is the economic equivalent of an epidemic—if not a pandemic—and seems to be a problem without solution.
However, jettisoning Brunner’s “certainty of hopelessness” test for discharging student loans would be one humane step in the right direction—a mostly-painless step for society that would bring relief to many people in severe personal and economic stress. [Note: If the Federal Government is concerned about student loan repayments, they should focus more heavily on that concern at the beginning of the loan!]
Here’s hoping the Supreme Court will take this opportunity to, (i) grant certiorari in McCoy v. United States, and (ii) overrule Brunner’s overly-harsh standard for discharging student loans.
Footnote 1. This summary of facts is taken from the Petition for a Writ of Certiorari (at 5-8) in McCoy v. U.S. (Supreme Court Docket 20-886).
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The key thing to remember about the extremely harsh Brunner test is that it was crafted when student loans could be discharged once they became five years old. The debtor in Brunner could discharge their student loans had they delayed filing the bankruptcy by a few years. Also, the Brunner debtor could have discharged them in a subsequent bankruptcy case filed a few years later. Given that background, it is understandable why the Brunner court crafted such a tough standard.
The problem is this: When Congress (with Joe Biden leading the charge) enacted the Bankruptcy Reform Act of 2005 declaring that student loans could never be discharged unless an Undue Hardship existed, the federal courts continued to apply the Brunner standard even though the entire context of that case had shifted. That’s the problem with courts continuing to apply the Brunner standard–is was based on a five-year time period.
The concept of a hardship is dramatically different if a debtor just has to wait 5 years to file a bankruptcy case versus the BAPCPA’s standard of NEVER being dischargeable. It’s the difference in pain of running a 100 yard dash versus a marathon. The context changed, but the courts refused to update their analysis.
The other factor in play is the advent of the Income-Based Repayment Plans. Courts refuse to grant hardship discharges of student loan debts when a debtor has failed to take advantage of the various IBR programs. Over time, however, the courts have slowly begun to realize that these programs are frauds. Why do I say that? Because in nearly 30 years of consumer bankruptcy practice I have never met a person who received forgiveness of their student loans from an IBR program. Not one. I don’t have a hard statistic to quote, but I suspect the percentage of debtors who actually complete these programs is less than 5%. That is a total guess. IBR is not a real solution.
Lots of folks enter into IBR programs. Almost nobody finishes them. The expectation that a debtor will complete a 20-year program requiring them to certify their income every year and to maintain 20 years of compliance is just not realistic. Heck, I can’t stick to a simple food diet for more than a week. But courts continue to deny discharge applications because they say a debtor can just enroll an an IBR.
So, let’s hope the Supreme Court can update the Brunner test to a more realistic standard. Specifically, I hope the court instructs bankruptcy judges to figure out the exact point of where a student loan debt total becomes “undue.” Instead of the current “all or nothing” discharge outcome, I hope the Court allows bankruptcy judges to grant partial discharges.
Thanks, Sam, for this most-helpful information!
My empirical research has shown that there is no statistically significant relationship between the test applied for undue hardship (i.e., the Brunner test or the totality-of-the-circumstances test) and a debtor’s litigation success in an adversary proceeding to determine the dischargeability of educational debt. See Rafael I. Pardo, Taking Bankruptcy Rights Seriously, 91 Wash. L. Rev. 1115, 1139–41, 1154–60, 1189 tbl.A8 (2016). That research is available at https://ssrn.com/abstract=2753403.
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Thanks for the information, Rafael.