By Jason Mizzell, Kroger Gardis & Regas LLP
McCoy v. United States
20-886
The famous – or infamous – Brunner test recently made its way to the Supreme Court for review. For those unfamiliar with the case, Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2d. Cir 1987) is the source of the longstanding test frequently used by bankruptcy courts to assess the dischargeability of student loan obligations on account of “undue hardship” as outlined in 11 U.S.C. § 523(8).
The Brunner test requires debtors to show that the debtor could not maintain a minimal standard of living if forced to repay the loans, that additional circumstances exist indicating that this state of affairs is likely to persist long-term, and that the debtor has made a good-faith attempt to repay the obligation. Cases applying the second prong of the Brunner test gave rise to the infamous “certainty of hopelessness” rhetorical flourish.
Since its very inception, the Brunner test has had critics. The most common criticism of the Brunner test has been that it does not accurately reflect the statutory language of the bankruptcy code. Other criticisms attack Congress’s policy choice to make student loans completely nondischargeable in 2005. As the student loan crisis has only worsened, critics have only gotten louder.
Recently, a Texas woman attempted to challenge the Brunner test at the Supreme Court. In McCoy v. United States, 20-886, the debtor sought review of the 5th Circuit’s determination that she did not meet the standard for discharge of her student loan debt as an “undue hardship.” The debtor’s argument in favor of Supreme Court review was that there is a circuit split between those circuits that adopt the strict criteria of the Brunner test and those that embrace a broader, case-by-case totality-of-the-circumstances approach.
The government’s response in opposition was that there was little practical difference between a totality-of-the-circumstances approach and the Brunner test. Therefore, the Supreme Court’s review was not warranted.
The Supreme Court declined to hear the matter, denying certiorari in late June. For now, the court’s view on whether Brunner accurately reflects the meaning of “undue hardship” remains a mystery.
Homaidan v. Sallie Mae, et. al., In re Homaidan
20-1981
Also of recent interest, in Homaidan v. Sallie Mae, et. al, the 2nd Circuit determined that private student loan obligations are dischargeable under § 523(a)(8)(A)(ii) because a private student loan is not an “obligation to repay funds received as an educational benefit, scholarship, or stipend.” Such obligations are like grants or scholarships that must be repaid. A private student loan does not fall into that category.
Under the 2nd Circuit’s analysis, private student loan debts are not covered by § 523(a)(A)(ii)’s limitation on nondischargeability. Because § 523(a)(A)(i) covers government student loans, in order for a private student loan be nondischargeable it must fall under § 523(a)(8)(B) as a “qualified educational loan.”
The term Qualified Educational Loan is a defined term and consists solely of aksikorski@indybar.orgmounts lent for qualified higher education expenses. Qualified Education Expenses is a defined term from the Internal Revenue Code that means expenses for tuition, fees, and other related expenses for an eligible student. By the 2nd Circuit’s logic, if a private student loan was used for something other than Qualified Educational Expenses, it is not a Qualified Educational Loan and is therefore dischargeable. The Court ultimately sided with the debtor and determined that the private student loan debt was dischargeable.
The Future
Although not yet adopted in the 7th Circuit, the 5th Circuit and the 10th circuit have both adopted the same position as the 2nd Circuit. No other circuits have ruled on this issue yet. If bankruptcy courts in this circuit take the same approach as the 2nd Circuit, it is only a matter of time before this issue makes its way up to the 7th Circuit. If the 7th Circuit joins the other circuits who have ruled on this issue, then it may present an opportunity for debtors to discharge debt that they believed was with them forever. For creditors and lenders, the possibility that private student loans may become generally dischargeable is a major risk that needs to be considered. It is unclear what impact such a ruling might have on lenders who have refinanced private or government student loans.
Even if the 7th Circuit were to join the other three circuits in their application of the Qualified Educational Loan requirement, the vast majority of student loan debt is still held by the government and still subject to the Brunner test.
It remains wholly unclear why a per curium opinion from one circuit in 1987 has been adopted as the definitive, end-of-discussion case as to the interpretation of “undue hardship” for student loan nondischargeability. To be fair to the Brunner Court, there is nothing wrong with the language of the Brunner opinion itself: the Brunner Court says that it would have thought it appropriate for the District Court to consider evidence of the debtor’s disability, her age, and expenses for dependents if any such evidence had been presented. But the lack of evidence prevented the District Court from concluding that the debtor was entitled to a discharge of her student loans.
Brunner may be the ultimate example of the lawyer’s cliché that hard cases make bad law. The reality is that other courts interpreting the Brunner test have either warped the test’s intent and adopted impossibly high standards for “undue hardship” or have had insufficient evidence to find for the debtor. Perhaps the ultimate conclusion is that the government had it right in McCoy: there is nothing wrong with the Brunner test at all: it really is just a totality-of-circumstances test that has been repeatedly misapplied over the last 30 years.
Though the Supreme Court declined to review the Brunner test this time around, it is inevitable that either the Supreme Court or Congress will need to take some action to address the issue of student loan nondischargeability. With student loan debt in the United States well in excess of $1.6 trillion dollars and rising seemingly without limit, an appropriate safety valve for a debtor’s fresh start that also recognizes the rights of creditors is an economic necessity.
If you would like to submit content or write an article for the Commercial & Bankruptcy Law Section, please email Kara Sikorski at ksikorski@indybar.org.
Subscribe to Commercial & Bankruptcy Law Section news here!
member center
