Accrued Interest on Student Loan Discharged as Undue Hardship
Posted by NCBRC – May 3, 2019
A Kansas bankruptcy court did not err in granting the debtor a discharge of the accrued interest on her student loans where she met the Tenth Circuit’s flexible version of the Brunner test, and the court has equitable power to grant less than a complete discharge. ECMC v. Metz, No. 18-1281 (May 2, 2019).
The debtor, age 59, was never in default on her student loans. Though she was continuously employed over the repayment period, the amount she owed grew over time from the original loan amount of $16,613.73, to $67,277.88. Beginning in 2001, she filed three chapter 13 bankruptcies and made all payments under her plans, receiving a discharge in the first two. In the third and current bankruptcy the debtor sought to discharge her consolidated student loan. The bankruptcy court found undue hardship but discharged only the accrued interest on the debt. The student loan creditor, ECMC, appealed. The debtor filed a cross-appeal seeking to have the entire debt discharged. NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor.
The Tenth Circuit applies a flexible version of the Brunner test under which all the facts and circumstances surrounding the debtor’s financial situation be considered to determine whether paying off the student loans would in fact constitute undue hardship. With this in mind, the court walked through the three prongs of the test: 1) the debtor cannot maintain a minimal standard of living while repaying the loan, 2) those circumstances are likely to persist for a significant portion of the repayment period, and 3) the debtor has made a good faith effort to repay the loan.
On appeal, ECMC argued that the debtor could not meet the first prong of the Brunner test because she could avail herself of an income-based-repayment plan (IBRP) which she could afford but which would not pay down principal. The district court found that the Tenth Circuit looks to whether a debtor can maintain her minimal standard of living while repaying the loan, not while participating in an IBRP that does not result in loan repayment. The court agreed with the bankruptcy court’s finding that the debtor did not have sufficient income, even after trimming expenses, to maintain that standard of living while repaying the loan. The court cautioned that this finding was based on the facts and circumstances of this case, leaving open the possibility that the availability of an IBRP that paid down the principal might be a relevant consideration when addressing the first Brunner prong. [As an aside, the court noted that ECMC’s assurance that the debtor would have no tax consequences at the end of the IBRP repayment period depended upon her remaining impoverished until she reached her eighties—“what a pleasant system.”]
ECMC next argued that there were no exceptional circumstances, such as illness or disability, to justify the bankruptcy court’s finding that the debtor’s inability to repay the loan would persist over a significant portion of the repayment period. The court rejected the notion that there had to be such conditions. Rather, the court looked to the debtor’s age and employment and income history and found it unlikely that, even with regular merit raises, she would ever be able to repay the loans.
ECMC next contended that because the debtor had not applied for an IBRP, had not minimized her expenses as much as possible, and was motivated to file a previous chapter 13 bankruptcies because of her student loans, she failed to show good faith. Though the Tenth Circuit permits consideration of IBRPs when looking at a debtor’s good faith, the court found that the evidence supported the debtor’s assertion that she could not afford to pay into a plan sufficient amounts to reduce her debt. For that reason, failure to apply was not evidence of bad faith. The fact that she filed for prior bankruptcies in part due to her student loans was also not dispositive of bad faith, particularly where, as here, the debtor made all payments under her plans in those bankruptcies.
The court turned to the debtor’s argument on cross-appeal that the bankruptcy court erred in granting only a partial discharge instead of discharging the entire loan. The court disagreed, finding that the bankruptcy court’s equitable powers under section 105(a) permit it to grant a partial discharge under section 523(a)(8) where undue hardship is found.
In conclusion, the court agreed with the bankruptcy court’s findings and affirmed the discharge of the interest on the debtor’s student loans.