A district court judge recently reversed and remanded a well-known bankruptcy decision discharging a significant student loan debt. In the Southern District of New York, Judge Philip Halpern, reviewing the bankruptcy court’s summary judgment decision de novo, found that neither the debtor nor the defendant were entitled to summary judgment under the familiar Brunner test.
Bankruptcy Court’s Previous Decision
On January 7, 2020, Chief Bankruptcy Judge Cecelia Morris in the Bankruptcy Court for the Southern District of New York issued a decision declaring that “[t]his Court will not participate in perpetuating these myths.” In re Rosenberg, 610 B.R. 454 (Bankr. S.D.N.Y. 2020). The “myth,” as described by Judge Morris, is the harsh standard imposed by the Brunner test for dischargeability of student loan debt. Generally, student loan debt is presumed non-dischargeable in bankruptcy. The exception is where a debtor can prove that “excepting such debt from discharge…would impose an undue hardship on the debtor and the debtor’s dependents” (11 U.S.C. § 523(a)(8)). The Second Circuit in Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987), set forth the following test for “undue hardship”:
- 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;
- 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
- That the debtor has made good faith efforts to repay the loans.
Judge Morris decried the “harsh results” often associated with Brunner, which she described as arising from “retributive dicta” in caselaw interpreting Brunner rather than from Brunner itself. Judge Morris sought to do away with this “quasi-standard of mythic proportion,” instead endeavoring to “apply the Brunner test as it was originally intended.”
After the above commentary on the overly harsh interpretation of Brunner, the court analyzed the three-part 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 his student loan discharged. The issue was before the court on cross-motions for summary judgment. Judge Morris granted summary judgment for the debtor, finding that the debtor satisfied the Brunner test, the student loans imposed an undue hardship, and therefore discharging the debtor’s student loan debt. Critical to the bankruptcy court’s determination was (1) the debtor’s undisputed statement of income and expenses showed a negative monthly income of about $1,500 (prong one); (2) the debtor’s present state of affairs was likely to persist for a significant portion of the repayment period because the loan debt was accelerated, hence, the repayment period had ended (prong two); and (3) the debtor showed good faith efforts to repay his loans because he made about 40% of his payments during the 26 months he was responsible for making payments (prong three).
District Judge Disagrees
After the defendant appealed, the district court reversed the grant of summary judgment for the debtor, affirmed the denial of the defendant’s cross-motion for summary judgment, and remanded. Judge Halpern broke down the three Brunner elements:
- Minimal standard of living
- The debtor failed to carry his burden. While the debtor’s statement of income and expenses did show a negative monthly income of about $1,500 and did go undisputed, Judge Halpern emphasized that the debtor must do more to make a sufficient showing on the first Brunner First, the debtor must offer a “substantive explanation” as to the necessity of his expenses. Second, the debtor must show how he would be unable to pay the student loan under available repayment plans and maintain a minimal standard of living.
- The defendant’s “cursory analysis” likewise failed to make a substantive showing regarding the necessity of the plaintiff’s expenses or his ability to maintain a minimal standard of living.
- Additional circumstances likely to persist
- Judge Halpern rejected the bankruptcy court’s argument that the debtor satisfied prong two upon showing that the loan was accelerated. First, Judge Halpern noted that no admissible evidence supported this conclusion. Second, even if there was, the debtor had the option of rehabilitating the loan. Further, the debtor’s claims that he suffered injuries and that his future employment prospects were dim were not supported by admissible evidence.
- The defendant simply stated that the debtor’s situation was a “monster of his own making,” but failed to deal with the factual issues of the potential impact of injury on the debtor’s future earning potential.
- Good faith
- Judge Halpern emphasized that this prong requires that the debtor’s condition result from factors beyond his control and ultimately found that the “constellation of evidence” suggests lack of good faith. Specifically, (1) during the about 10-year period the debtor moved between forbearances and deferment, he had enough money to move out of New York City to rent a two-bedroom house, but only made less than $3,000 on student loan payments on a debt that ballooned from about $116,000 to over $220,000; (2) the debtor abandoned his legal career; (3) he filed his bankruptcy petition with the explicit purpose of discharging his student loan debt; and (4) he represented that he had no interest in rehabilitating the debt through a repayment program.
- The defendant also failed considering the gaps in the evidence, including arguments regarding the reason for the debtor’s deferments and forbearances, where the debtor’s income went if not to pay for the student loans, and the import of the debtor’s alleged injuries.
Successful Brunner, undue-hardship discharges for student loan debt are rare. The debtor’s seeming win in the bankruptcy court was short lived after the district court reviewed the decision and came to a different conclusion for each of the elements. This is yet another chapter in the case law applying the Brunner standard. Participants in the student loan space should keep an eye on the final outcome of the Rosenberg case now that it has been remanded.