Source: https://casetext.com/case/in-re-brunner
Timestamp: 2019-03-22 16:50:01
Document Index: 312730503

Matched Legal Cases: ['§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 674', '§ 674']

In re Brunner, 46 B.R. 752 | Casetext
46 B.R. 752 (S.D.N.Y. 1985)
This is an appeal from an April 12, 1983 oral decision of Hon. Howard Schwartzberg, Bankruptcy Judge, discharging appellee Marie Brunner's student loans pursuant to 11 U.S.C. § 523(a)(8)(B). Section 523(a)(8)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(8)(A), declares such loans nondischargeable for five years after they first come due, but § 523(a)(8)(B) creates an exception to the general rule if the failure to discharge would "impose an undue hardship on the debtor and the debtor's dependents." Judge Schwartzberg found such undue hardship and discharged appellee's student loans. Appellant New York State Higher Education Services Corp. ("HESC"), guarantor of the loans, contends that this was error.
"Undue hardship" is undefined in the Bankruptcy Code. The existence of the adjective "undue" indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans, but the statute otherwise gives no hint of the phrase's intended meaning. The question has produced a daunting proliferation of decisions in the Bankruptcy Courts, but there is little appellate authority. The statutory history has thus provided the lodestone for most interpretations.
The sole authority from the Courts of Appeals appears to be In re Andrews, 661 F.2d 702 (8th Cir. 1981); the only published decision from the district courts is a summary affirmance, In re Wells v. People ex rel. Illinois State Scholarship Commission, 37 B.R. 687 (N.D.Ill. 1984).
Congress itself had little to say on the subject. The initial House bill deleted any reference to student loans, while the Senate bill included language similar to that present in the final bill. See H.R. 8200, 95th Cong., 1st Sess. (1977), reprinted in Collier on Bankruptcy, Appendix 3 (15th Ed. 1979), at III-1 (hereafter "Collier"); S. 2266, 95th Cong., 2d Sess. (1978), reprinted in Collier, supra, Appendix 3, at VII-1, 417. The Senate Report which accompanied the bill, however, is mute on the issue of undue hardship, noting merely that the bill "follows generally current law and excepts from discharge student loans until such loans have been due and owing for five years." The final compromise bill accepted the Senate's language, but the report of the compromise committee — printed only as the remarks of the two Congressional sponsors of the bill — again ignores undue hardship. See, e.g., 124 Cong.Rec.H. 11096, 95th Cong., 2d Sess. (daily ed. Sept. 28, 1978), reprinted in Collier, supra, Appendix 3, at IX-101.
Most courts have accepted that a debtor must at least satisfy the "minimal standard of living" test before a discharge of his or her student loans will be granted. See, e.g., In re Johnson, 5 B.C.D. 532, 537 (Bankr.E.D.Pa. 1979); In re Andrews, 661 F.2d 702, 704 (8th Cir. 1981). That is, before receiving a discharge of student loans the debtor is required to demonstrate that, given his or her current income and expenses, the necessity of making the monthly loan payment will cause his or her standard of living to fall below a "minimal" level. Indeed, if the calculation of future earnings and expenses were an exact science, a similar showing extended into the future might be all that would be necessary to justify discharge. After all, it is not unreasonable to hold that committing the debtor to a life of poverty for the term of the loan — generally ten years — imposes "undue" hardship.
Predicting the future, however, is never so easy. Minimum necessary future expenses may be ascertained with some precision from an extrapolation of present needs, but unpredictable changes in circumstances such as illness, marriage, or childbirth may quickly wreak havoc with such a budget. Even more problematic is the calculation of future income. It is the nature of § 523(a)(8)(B) applications that they are made by individuals who have only recently ended their education. Their earning potential is substantially untested, and because they are inexperienced they are in all likelihood at the nadir of their earning power. They may, like appellee, have had difficulty in securing employment immediately after graduation. Extrapolation of their current earnings is likely to underestimate substantially their earning power over the whole term of loan repayment.
It is no doubt for this reason that many courts have required more than a showing on the basis of current finances that loan repayment will be difficult or impossible. Perhaps the best articulation of this doctrine is that of Judge Lifland of the Bankruptcy Court of this district, who wrote that "dischargeability of student loans should be based upon the certainty of hopelessness, not simply a present inability to fulfill financial commitment." In re Briscoe, 16 B.R. 128, 131 (Bankr.S.D.N.Y. 1981). Stated otherwise, the debtor has been required to demonstrate not only a current inability to pay but additional circumstances which strongly suggest that the current inability to pay will extend for a significant portion of the repayment period of the loan.
This position has gained a number of adherents. See, e.g., In re Moorman, 44 B.R. 135, 137 (Bankr.W.D.Ky. 1984); In re Reid, 39 B.R. 24, 26 (Bankr.E.D.Tenn. 1984); In re Love, 33 B.R. 753, 755 (Bankr.E.D.Va. 1983); In re Holzer, 33 B.R. 627, 632 (Bankr.S.D.N.Y. 1983) (Berk, B.J.); In re Lezer, 21 B.R. 783, 788 (Bankr.N.D.N.Y. 1982).
In addition to Judge Lifland's language, this test has been formulated as the necessity of showing of "unique" or "exceptional" circumstances. See, e.g., In re Densmore, 8 B.R. 308, 309 (Bankr.N.D.Ga. 1979); In re Rappaport, 16 B.R. 615, 617 (Bankr.D.N.J. 1981). Such circumstances have been found most frequently as a result of illness, e.g., In re Norman, 25 B.R. 545, 550 (Bankr.S.D.Cal. 1982), a lack of usable job skills, e.g., In re Seibert, 10 B.R. 704 (Bankr.S.D.Ohio 1981), the existence of a large number of dependents, In re Clay, 12 B.R. 251 (Bankr.N.D.Iowa 1981), or a combination of these. In re Diaz, 5 B.R. 253 (Bankr.W.D.N.Y. 1980); Shoberg v. Minnesota Higher Education Coordinating Council, 41 B.R. 684, 687 (Bankr.D.Minn. 1984); In re Dresser, 33 B.R. 63 (Bankr.D.Me. 1983).
Some courts, following the lead of In re Johnson, supra, 5 B.C.D. at 740, have required a showing of "good faith" prior to discharge. There is no specific authority for this requirement, but the need for some showing of this type may be inferred from comments of the Commission report. In discussing the discharge of loans after five years, when a showing of undue hardship is no longer required, the Commission noted that such discharge is fair because the debtor may be unable to repay his or her debts due to "factors beyond his reasonable control." Report, supra, at 140 n. 16. If external circumstances were seen as justifying discharge after five years, it is likely that only such circumstances should be permitted to justify discharge prior to that time. The propriety of a requirement of good faith is further emphasized by the stated purpose for § 523(a)(8): to forestall students, who frequently have a large excess of liabilities over assets solely because of their student loans, from abusing the bankruptcy system to shed these loans. Id. at 140, n. 14. Thus it is proper to require a debtor to show that he or she has made good faith efforts to repay the loan and that the forces preventing repayment are truly beyond his or her reasonable control. See In re Rappaport, supra, 16 B.R. at 617.
In connection with the showing of good faith and circumstances beyond the control of the debtor several courts have permitted debtors to discharge their loans upon a showing that the education for which the loans paid has been of little use to them. See, e.g., In re Littell, 6 B.R. 85 (Bankr.D.Or. 1980); In re Connolly, 29 B.R. 978, 982 (Bankr.D.Fla. 1983); In re Powelson, 25 B.R. 274, 276 (Bankr.D.Neb. 1982). Consideration of this factor is not only improper, it is antithetical to the spirit of the guaranteed loan program. As described in more detail infra, the loan program grants aid regardless of the financial stability of the debtor or the wisdom of his or her individual choice to pursue further education. Consideration of the "value" of the education in making a decision to discharge turns the government into an insurer of educational value. Those students who make wise choices prosper; those who do not seek to discharge their loans in bankruptcy. This is wholly improper.
Because of this enlightened social policy, those whose past work or credit record might foreclose them from the commercial loan market are able to obtain credit at subsidized rates to advance their education. Those who might obtain loans only at exhorbitant rates are similarly able to obtain low cost, deferred loans. In return for this largesse — and it is undeniable that guaranteed student loans have extended higher education to thousands who would otherwise have been forced to forego college or vocational training — the government exacts a quid pro quo. Through § 523(a)(8) it commits the student to repayment regardless of his or her subsequent economic circumstances. In return for giving aid to individuals who represent poor credit risks, it strips these individuals of the refuge of bankruptcy in all but extreme circumstances. See Johnson v. Edinboro State College, 728 F.2d 163, 164 (3d Cir. 1984) (Section 523(a)(8) represents a conscious Congressional choice to override the normal "fresh start" goal of bankruptcy). This is a bargain each student loan borrower strikes with the government. Like all bargains, it entails risk. It is for each student individually to decide whether the risks of future hardship outweigh the potential benefits of a deferred-payment education.
The government is not out to make life as unpleasant as possible for borrowers who suffer financial difficulties. Deferment and cancellation are available under appropriate circumstances. See 34 C.F.R. §§ 674.34, 674.34a, 674.51-59 (1984) (National Direct Student Loan program).
It remains to apply these principles of law in review of the decision at hand. Under Bankruptcy Rule 8013, the "clearly erroneous" standard of review is applicable to findings of fact by a Bankruptcy Judge, but "the district court is not bound by the clearly erroneous standard when reviewing the bankruptcy court's application of a legal standard to facts reasonably found." In re Penn-Dixie Industries, Inc., 9 B.R. 936, 938 (S.D.N.Y. 1981).
In short, appellee at most proved that she is currently — or was at the time of the hearing — unable both to meet her minimal expenses and pay off her loans. This alone cannot support a finding that the failure to discharge her loans will impose undue hardship. See, e.g., In re Briscoe, supra, 16 B.R. at 131; In re Henry, 4 B.R. 495 (Bankr.S.D.N Y 1980); Panteli v. New York State Higher Education Services Corp., 41 B.R. 856, 858 (Bankr.S.D.N.Y. 1984). Nothing in the record supports a finding that it is likely that her current inability to find any work will extend for a significant part of the repayment period of the loan or that she has "a total incapacity now and in the future to pay [her] debts for reasons not within [her] control." In re Rappaport, supra, 16 B.R. at 617. She is skilled, apparently capable, well, and without dependents. Nor has she adequately demonstrated good faith in attempting to pay off her loans. She filed for discharge within a month of the date the first payment of her loans came due. She has made virtually no attempt to repay, nor has she requested a deferment of payment, a remedy open to those unable to pay because of prolonged unemployment. See, e.g., 34 C.F.R. § 674.34(d)(2) (1984). Inasmuch as this is her primary reason for requesting discharge, initial resort to the less drastic remedy of deferment would have been more appropriate than bankruptcy.
Even this is uncertain. The bankruptcy judge failed to require, and appellee failed to submit, a statement of expenses and income. The testimony at the hearing, accepted at face value, indicates that appellee had been surviving for several months on monthly income of $107 in food stamps and cash above the cost of her rent. From this $107 appellee must have paid for food, clothing, utilities, entertainment, and the costs of registering, insuring, and maintaining a $2,400 car. It seems incredible that this sum could stretch so far, indicating that appellee had sources of income which she failed to reveal. It must be remembered that although appellee's budget was this thin, she nevertheless felt financially secure enough to spend her life savings on a car one to two months prior to the hearing.