District Court Finds that Income-Based Repayment Plans would Thwart Debtors’ Fresh Start in Affirming Partial Discharge of Student Loans

District Court Finds that Income-Based Repayment Plans would Thwart Debtors’ Fresh Start in Affirming Partial Discharge of Student Loans

This matter comes before the court upon Appellant Educational Credit Management Corporation (“ECMC”)’s Notice of Appeal from Bankruptcy Court. The matter is fully briefed. The court granted Amicus Parties National Association of Consumer Bankruptcy Attorneys (“NACBA”) and National Consumer Bankruptcy Rights Center (“NCBRC”)s’ motion to file an amicus brief.

I. Background

Appellant ECMC appeals the United States Bankruptcy Court’s decision to partially discharge appellees’ student loans pursuant to 28 U.S.C. §§ 158(a)(1), (c)(1)(A). Appellant argues that appellees  did not meet their burden of establishing an undue hardship as required by § 528(a)(8) and as interpreted by the Tenth Circuit, because they failed to show any of the three elements enumerated in Brunner v. New York State Higher Education Services Corporation, 831 F.2d 395, 396 (2d Cir. 1987).

Appellees argue that they met all three elements of the undue hardship test and that requiring them to repay the full extent of their student loan debt would contravene the Bankruptcy Code’s purpose of providing a fresh start to honest but unfortunate debtors. They urge this court to uphold Bankruptcy Judge’s decision because it was based on debtors’ testimony and the unopposed evidence admitted at trial.

The amici additionally suggest that debtors should not be required to participate in income-driven repayment programs (“IDRs”), as an alternative to bankruptcy, when it is evident that debtors would never be able to repay their loans in full. Amici suggest that IDRs should not be considered in the undue hardship analysis.

11 U.S.C. § 523 sets out the exceptions to the dischargability of debt in bankruptcy. Section 523(a)(8) provides that educational loans are not dischargeable “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8). “This provision was enacted to prevent indebted college or graduate students from filing for bankruptcy immediately upon graduation thereby absolving themselves of the obligation to repay their student loans. In re Innes, 284 B.R. 496, 502 (D. Kan. 2002) (quoting In re Hornsby, 144 F.3d 433, 437 (6th Cir. 1998)). The Tenth Circuit in Polleys further examined § 523(a)(8)’s legislative history, noting that the Report of the Commission on Bankruptcy also recommended that the undue hardship exception to discharge should apply only during the first five years after graduation, and that thereafter it should be lifted because “in some circumstances the debtor, because of factors beyond his reasonable control, may be unable to earn an income adequate both to meet the living costs of himself and his dependents and to make the educational debt payments.” Id.

In adopting the Brunner test, the Tenth Circuit specifically warned against an overly restrictive interpretation of the test, because it would prevent the Bankruptcy Code’s goal of providing a fresh start for the honest but unfortunate debtor and “cause harsh results for individuals seeking to discharge their student loans.” Id. at 1308 (citing Stellwagen v. Clum, 245 U.S. 605, 617 (1918)).

Under the Brunner test, debtors must show by a preponderance of the evidence, each of three elements:

(1) that [they] cannot maintain, based on current income and expenses, a “minimal” standard of living for [themselves and their] 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[s have] made good faith efforts to repay the loans.

Polleys, 356 F.3d at 1307 (quoting Brunner, 831 F.2d at 396). In adopting the Brunner test, the Tenth Circuit noted that the analysis would necessarily include a consideration of all the facts and circumstances of each case. However, the court noted that judges should have “the discretion to weigh all relevant considerations, [and that] the terms of the test must be applied such that debtors who truly cannot afford repay their loans may have their loans discharged.” Id. at 1309.

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