Celebrating 10 years! 2007-2017

What's behind the Brunner standard that makes student loans non-dischargeable in bankruptcy?

Has anyone ever investigated why the Undue Hardship exceptio ericcrapton01/13/18
Yes. Legislatures (both federal and state) have given the sh finklebots01/14/18
You used to be able to discharge before income based repayme fettywap01/13/18
Actually here's a lady who's 62 living in a motel with no as trijocker02/03/18
The government wants its cut. isthisit01/13/18
income based repayment and forbearance are the reason studen dingbat01/14/18
The auto makers had their debt discharged in bankruptcy. B trijocker01/14/18
If they were dischareable the easy money would have to go aw david6198301/14/18
that makes no sense. but if you blame everything on "libs", dingbat01/14/18
I am not following this argument, but given that it contains guyingorillasuit01/14/18
That's not true, though. IBR payments make your interest run guyingorillasuit01/14/18
That's pretty bad. You should contact the federal student lo ericcrapton01/14/18
That's really a sad story, what's the point of these program trijocker01/19/18
Also, it’s different than other consumer debt. A college rwhyan01/14/18
The banks spread an urban myth when the 1978 bankruptcy Refo passportfan301/14/18
One other reason student loans aren't dischargeable - the ra caj11101/15/18
Well, in keeping with the OP’s original question.... Th qdllc01/19/18
I wonder how many people have fled the country and assumed a frankythefly02/03/18
Not many that I know of, but several have. Once they know i qdllc02/04/18
I have one friend from undergrad who managed to rack up $125 flyer1402/04/18
Why run away? You can’t go to jail for not paying. Just ta jdslug02/04/18
Brunner was clearly well within congressional intent when de onehell02/05/18

ericcrapton (Jan 13, 2018 - 9:53 pm)

Has anyone ever investigated why the Undue Hardship exception has been interpreted to mean student loans are non-dischargeable in almost all bankruptcies? Is the judicial interpretation in the Brunner case clearly supported by the legislative intent?

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finklebots (Jan 14, 2018 - 1:31 am)

Yes. Legislatures (both federal and state) have given the shaft to student loan debtors. Most notably, in 2005 Congress made private student loans non-dischargeable in banktuptcy. Even liberal California politicians were bought off by banking interests several years ago when a bill came up that would have limited private student lenders' rights to garnish wages. Money talks and student loan serfs have no political voice.

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fettywap (Jan 13, 2018 - 10:25 pm)

You used to be able to discharge before income based repayment started. Probably still can for someone who has terminal cancer or something, but someone in that condition doesn't need to be going to court. I don't know why judges treat student loans differently. Some of the terms on private loans are ridiculous. They don't deserve to be repaid.

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trijocker (Feb 3, 2018 - 8:50 pm)

Actually here's a lady who's 62 living in a motel with no assets
JDU thinks it is just law school debt that is unfair, but it burdens everyone

Most likely if you haven't been able to work, are 62 and living in a daily motel and on food stamps you do not have extra cash to pay back student loans.
https://www.dallasnews.com/news/courts/2018/02/02/no-home-car-job-after-bankruptcy-still-owes-student-loans

Some of the others listed in this article are younger and have assets, but probably no discharge.
https://www.dallasnews.com/news/education/2017/08/23/texans-college-debt-quiet-reality-life-burdened-loans

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isthisit (Jan 13, 2018 - 10:43 pm)

The government wants its cut.

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dingbat (Jan 14, 2018 - 9:51 am)

income based repayment and forbearance are the reason student loan debt can't be discharged in bankruptcy - under IBR, your student loan payments are never more than you can afford, and if you can't afford to pay it, forbearance will put it off.

Historically, bankruptcy was an equitable way for creditors to get the monies owed to them. Later on, it evolved to include a way for debtors to not be overburdened.
To this day, under bankruptcy laws, if you can afford to make payments on your debts, you are required to do so, and if you're unable to do so unsecured creditors will typically take a haircut and get a payment plan (either negotiated or court-determined0.

For student loans, that's simply not necessary - IBR/forbearance is the payment plan and the debt will be automatically discharged after 20/25 years. So there's no need for bankruptcy protections, it's already built into the loan.

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trijocker (Jan 14, 2018 - 12:18 pm)

The auto makers had their debt discharged in bankruptcy.
Big companies that did not need to enroll in forbearance or income based repayment programs.

Why cripple the nation making an entire class of impoverished student debtors who can never escape the crushing debt on their back?

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david61983 (Jan 14, 2018 - 2:23 pm)

If they were dischareable the easy money would have to go away. Libs will never allow it.

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dingbat (Jan 14, 2018 - 7:32 pm)

that makes no sense. but if you blame everything on "libs", neither do you

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guyingorillasuit (Jan 14, 2018 - 7:47 pm)

I am not following this argument, but given that it contains the word "libs", I am guessing that it was never intended to make any sense.

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guyingorillasuit (Jan 14, 2018 - 7:14 pm)

That's not true, though. IBR payments make your interest run up so high that you can basically never in your life, ever, show income above $50k or so, unless you have enough cash to pay the loan off in a lump sum.

Here's the second reason: in 2016, I refied from IBR into PAYE. This somehow eliminated all of my prior service years for forgiveness purposes, and I have to start my 25 years from 2016. This is mind boggling to me. I expressly asked whether I will waive forgiveness years, and was told "no". I complained to Nelnet and to CFPB, but I doubt anything will come of it.

So no, forgiveness in this case is nothing like bankruptcy.

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ericcrapton (Jan 14, 2018 - 10:48 pm)

That's pretty bad. You should contact the federal student loan ombudsman about this. https://studentaid.ed.gov/sa/repay-loans/disputes/prepare

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trijocker (Jan 19, 2018 - 1:04 pm)

That's really a sad story, what's the point of these programs?
Also, if you graduated from a crappy low level law school, and just worked doc review for years you might not ever make over 50k per year, yet are permanently saddled with this debt.
Why punish students for trying to better themselves when other loans are dischargeable?

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rwhyan (Jan 14, 2018 - 6:13 pm)

Also, it’s different than other consumer debt. A college education or degree is not a tangible good that can be repossessed by the creditor.

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passportfan3 (Jan 14, 2018 - 7:31 pm)

The banks spread an urban myth when the 1978 bankruptcy Reform was being debated.

Evil medical students -- they were the bad guys then -- would rack up enormous student loan balances, declare bankruptcy after graduation, and then waltz debt-free into high-paying M.D. gigs.

Now, if you know anything about how medical careers or BK work, that's balderdash. And the stats contradicted the story, because med students were not defaulting at a higher rate than anyone else.

But, to this day, I hear about friends of friends who "racked up student loans, declared bankruptcy and are now rich."

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caj111 (Jan 15, 2018 - 10:28 am)

One other reason student loans aren't dischargeable - the rates are for the most part lower than if you borrowed a regular unsecured loan from a bank or on a credit card. There is no question, that if the law was changed to allow loans to be discharged in a bankruptcy, that lenders would demand higher rates or exit the business entirely.

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qdllc (Jan 19, 2018 - 12:56 pm)

Well, in keeping with the OP’s original question....

The “undue hardship” test is a three-prong question with loopholes you could fly a 777 through.

1. Inability to afford payments.
2. Future earnings unlikely to improve to change #1.
3. Making payments in good faith.

ICR/IBR throws a monkey wrench into the first prong. I’d argue that prong 1 equates to “Can you afford payments that satisfy the debt on or before the end of the financing term?” Clearly that answer would be “no” for income-contingent borrowers, but others argue that anyone can meet the ICR/IBR payment and don’t qualify. There is debate about the “tax bomb” on the amount forgiven at the end of the term and if it should be a factor. Tax obligations are not dischargeable in bankruptcy, so to not allow bankruptcy discharge prior to the tax bomb is unjust.

Prong 2 is messed up in that many districts seem to embrace “utter hopelessness” for “undue hardship.” In my area, an attorney with MS who could only work one day a week was denied bankruptcy relief because he “could work.”

Finally, prong 3 can be messy. If you ever get thrown into default, does it show you haven’t paid in “good faith?” If you do as I do and strive to pay the minimum and save up for the tax bomb at the end, is that acting in bad faith (the alternative being to pour all you can into a black hole of debt and in the end be penniless when the tax bomb arrives)?

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frankythefly (Feb 3, 2018 - 3:33 pm)

I wonder how many people have fled the country and assumed a new identity in an attempt to get away from student loan debt. "I've always wanted to go to Tanzania."

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qdllc (Feb 4, 2018 - 8:08 am)

Not many that I know of, but several have. Once they know it’s hopeless, they travel to a country where either they can’t be reached or it’s not worth they cost to try and pursue them. It does generally mean tossing your passport and disappearing into the local population.

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flyer14 (Feb 4, 2018 - 10:12 am)

I have one friend from undergrad who managed to rack up $125k in loans, mostly private, pursuing a useless liberal arts degree. State school but out of state tuition rates.

It took the friend five years to find a job outside of retail or warehouses. Now 30, the friend made about $32k last year and the student loans have accrued interest and are now north of $210k. About 150 of this is private, the remainder is federal (Nelnet I believe).

Opinions and ways to get rid of this debt are welcome.

Applying the Sixth Circuit’s “minimum standard of living” in the Wallace case left the friend with about $100 left in the friend’s budget at the end of the month, which the friend plans to send as partial payment to the lenders (whose minimum payments are more like $1,500).

I question if a situation like this (where the payments made are unlikely to ever pay off the interest much less the principal) would qualify as the certainty of hopelessness. Many loans are variable and the interest rate is north of 10%... so I reckon any pay raises would be eaten by the interest snowball and then some.

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jdslug (Feb 4, 2018 - 4:35 pm)

Why run away? You can’t go to jail for not paying. Just take a cash job.

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onehell (Feb 5, 2018 - 12:09 pm)

Brunner was clearly well within congressional intent when decided, largely because Brunner herself had horrible facts. Now, a combination of inertia and the availability of IBR makes it so that there is no political will to legislatively change the definition.

Marie Brunner's case in the 2nd circuit was decided in 1987. Her district court case in 1985, and her original bankruptcy court decision was from 1983. Miraculously, the original bankruptcy court discharged the debt just because she couldn't find a job as a social worker and was seeing a therapist. The district court reversed, noting that she hadn't even tried to find work as a secretary or anything else, and that merely seeing a therapist does not mean you are so mentally impaired that you couldn't be expected to even try. The second circuit affirmed the district court's reversal of the bankruptcy court and in so doing, enshrined into appellate caselaw the three prongs we know so well today.

Her student debt was a paltry $9,000 from an MSW. Adjusted for inflation, that's right around 20k today, for a bachelors and a masters. By any measure, that was a reasonably priced education.

Brunner herself was pro per. She had no dependents, and was not disabled or elderly. She filed for her discharge only 10 months after graduation, and in fact she filed within a month of the due date of her first payment. So she literally just waited until her grace period was over and then immediately filed for bk. Her only argument for discharge was that there just wasn't much demand for mental health workers at the time, so she hadn't had luck with her numerous applications. But again, 9k of debt, as the district court noted, was quite payable on even the salary of a clerical worker or almost any other job, which she had made no effort to attain.

So when the case was decided, the test it cemented into law was very common-sense: You should have tried to pay the loan back, been unable to do so, and your difficulty can't be temporary or self-imposed. That's not a difficult test to apply to someone who defaulted on their very first payment, who has no disability or kids, and who never filed a single application for any job outside the specific professional field in which she was trained (social work).

She appealed pro per, and she made bad law for an entire nation of debtors in the process. She could've paid her debt back on the salary of a secretary. She wasn't even trying. But one particularly problematic prong of the test (the idea that your inability to pay must be very likely to persist throughout the life of the loan) is now applied against people with much more sympathetic facts and much bigger debts. They lose, merely because it is hypothetically POSSIBLE that they COULD get a decent job, the actual likelihood of them accomplishing that in current economic conditions being largely irrelevant. Brunner had essentially argued for a test that says a person should be able to get a discharge if they can't find a job that actually uses what they learned in school, as opposed to any job that would allow them to service the debt. That puts the taxpayers on the hook for your decision to enter a glutted field and in an era when school was not very expensive, that hardly seemed like a reasonable position, The obviousness of this was clearly reflected in the brevity of the 2nd circuit's decision, which weighs in at a mere 6 paragraphs.

So, because the story of the person whose case led to the enshrinement of the test was so totally unsympathetic, there would be no reason for anyone in congress to take notice of this decision and the test it cemented into law, not at the time. Now, it is firmly entrenched because one person decided to go pro per on an absolute crap case back in the 1980s. And that is right legally speaking, as the meaning of the law does not change merely because school has gotten exponentially more expensive since the statute was written. The decision was clearly within congressional intent when decided, so any change by congress would indeed be making new law, not telling the courts they got it wrong. Frankly, they didn't. No one could have anticipated in the early/mid 1980s the kinds of debt loads people would be carrying today, nor the kind of aggressive and misleading marketing schools now engage in, nor the massive devaluation of college degrees associated with the fact that pretty much everyone goes to college now, nor the extension of the same test to private loans that was part of BAPCPA in (I think) 2005 or so.

The moral of the story is that bad facts not only make bad law, but also give lawmakers no reason to intervene, which serves as further proof that the caselaw is consistent with legislative intent.

Thanks Marie Brunner!

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