Chief Bankruptcy Judge Cecelia Morris in the Bankruptcy Court for the Southern District recently reinterpreted Brunner’s “undue hardship” test and discharged over $220,000 in student loan debt. This opinion reflects a marked departure from a series of cases interpreting Brunner, a case that has guided the analysis of student loan dischargeability for over 30 years.
In Rosenberg v. N.Y. State Higher Education Services Corp. the court found that “[t]he harsh results that are often associated with Brunner are actually the result of cases interpreting Brunner. Over the past 32 years, many cases have pinned on Brunner punitive standards that are not contained therein.” In contrast, Judge Morris held that for debtors “who have been out of school and struggling with student loan debt for many years, the test is fairly straight-forward and simple.”
The opinion chronicles how cases that followed Brunner resulted in “retributive dicta [that] were then applied and reapplied so frequently in the context of Brunner that they have subsumed the actual language of the Brunner test. They have become a quasi-standard of mythic proportions so much so that most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans.” The court made clear, however, that it was not going to follow suit: “[t]his Court will not participate in perpetuating these myths.”
After extensive commentary on the overly harsh Brunner interpretation, the court analyzed the three-part Brunner test and found the debtor qualified to have his student loan debt discharged. The debtor’s undergraduate and law school loan debt became a federal consolidation loan totaling $221,385. The debtor filed an adversary proceeding pro se to have the student loan discharged. The issue was before the court on cross-motions for summary judgment.
First, the court found that the debtor could not maintain a minimal standard of living based on his current income and expenses. Under the codified “means test,” the debtor declared under penalty of perjury that he had negative monthly income. The student loan at issue was over $221,000, and the debtor was incapable of paying the loan and maintaining a minimal standard of living.
Second, the court determined that the debtor’s financial state of affairs was likely to persist. The court was quick to note that “the Brunner test does not require the Court to make a determination that the Petitioner’s state of affairs are going to persist forever” nor does it require whether the situation was created by the debtor’s choice. Rather, the question is whether the state of financial affairs is likely to persist for a significant portion of the repayment period of the student loan, which the court found did exist.
Third, the court found the debtor had made good faith efforts to repay the loans. The only question here was past behavior, not the reasons for bankruptcy, amount of debt, or whether repayment options were rejected. Over the 13-year life of the loan, it had been in forbearance, income-based repayment, and the debtor had made payments of varying amounts during IDR period and in the forbearance period when none were due. This led the court to conclude “the Petitioner did not sit back for 20 years but made a good faith effort to repay his Student Loan.”
This opinion attacks conventional analysis of the Brunner test and adds to the number of courts that are slowly addressing and finding scenarios where student loan debt may be dischargeable. In addition to these noteworthy opinions, Sen. Elizabeth Warren recently proposed a bankruptcy reform plan that would repeal the changes enacted in 2005 to the bankruptcy code as part of her presidential platform and has also promised to take executive action to cancel many student loans. Student loans in bankruptcy continue to be a developing area and certainly a topic to keep an eye on in the days ahead.