A recent case has been reviewed and re-reviewed by a higher court by using
the standards established in
Brunner v. New York State Higher Educ. Servs. Corp. (Brunner v. NYSHE). Within the case, a woman filed to become a
Chapter 7 Debtor due to $112,000 of
student loan debt that she claimed would be an “undue hardship” upon her to
try to repay. The bankruptcy court assigned to her petition initially
agreed that the debt was indeed too much for her to bear and approved
of a total student loan discharge. However, the creditor believed the
bankruptcy court used an erroneous method when evaluating her debt, income,
and good faith, and so appealed that court’s decision up to a United
States District Court. This higher court agreed with the creditor and
reversed the lower court’s discharge approval.
Understanding the Three Prongs of the Brunner Test
As set by 11 U.S.C. § 523(a)(8), individual debtors are not eligible
to discharge student loan debt through a bankruptcy filing without first
showing convincingly that the debt is an undue hardship. Interestingly
enough, undue hardship is not a legal term that is first outlined by the
Bankruptcy Code. Instead, it was set by
Brunner v. NYSHE and what has since been called the Brunner test.
The Brunner test consists of a three-pronged definition of undue hardship:
- After evaluating the debtor’s income and average cost of living,
it is found that trying to repay a student loan debt would sink them to
a lower standard of living.
- It is determined that the risk of falling to a lower standard of living
through repayment of student loan debt will persist for an extended period
of time, or for the majority of the planned repayment period.
- The debtor filing for student loan bankruptcy has indeed made a real and
honest effort to repay the loans.
The Brunner test examines the debtor’s financial ability to repay
student loan debts, the likelihood or lack thereof that the debtor could
eventually repay it with planning, and the debtor’s previous efforts
to repay that debt. The creditor in pursuit of the debt does not have
to disprove these points, as the burden of proof falls upon the debtor,
which was established in
Educ. Credit Mgmt. Corp. v. Mosley. If any of these three prongs are not met satisfactorily, the Brunner test
is failed and the debtor’s debt should not be discharged.
Brunner v. NYSHE to Debtor’s Petition
Even though the first Bankruptcy Court found that the debtor in the aforementioned
case had passed the Brunner test, the higher District Court concluded
the second prong was not met. That is to say, the debtor never inarguably
established that repaying the debts would always be a financial impossibility.
In response to the District Court’s appeal, the debtor presented
the argument that a
de novo standard was used, rather than correctly reviewing the lower court’s
decision in search of an error. A
de novo review involves a higher court replacing a lower court’s facts regarding
a case with its own to reach its appellate decision. The 11th Circuit was called upon to make a final decision regarding whether or
not the District Court used the wrong standards of judgement. It found that
de novo was inappropriate for the debtor’s student loan discharge case,
and that it should have only reviewed the case for legal errors.
The case has recently been remanded and will need to be addressed by the
District Court again, but this time, only the presence of legal errors
by the Bankruptcy Court should be measured. It is worth noting that the 11th Circuit court also did not feel that the debtor had met the right standards
in the Brunner test to receive a total discharge; it felt that the second
prong was unmet. The court’s hierarchy system still leaves this
final decision in the hands of the Bankruptcy Court. The debtor should
soon have another opportunity to argue for her petition.
NACBA Interests & Legal Help for Bankruptcy Cases
The National Association of Consumer Bankruptcy Attorneys (NACBA), which
is the largest association of bankruptcy attorneys in the country, has
taken notice of this case, as it could conclude with a direct impact to
how the Brunner test is used in all future cases.
Attorney Jim Haller of Sulaiman Law Group, LTD. is the current acting President of the NACBA,
and has an impressive history of representing consumer clients seeking
individual bankruptcies. If you need his assistance for a case of your
own, you can
contact the law firm online to request an initial consultation.