Thursday, July 26, 2012

The Murky And Discretionary Threshold Between A Finding Of “Hardship” And A Finding Of “Undue Hardship.”

In the case of In Re Ayele, 468 B.R. 24 (Bkrtcy.D.Mass. 2012), the bankruptcy court addressed whether debtor was entitled to “undue hardship” discharge of his roughly $30,000 in student loan debt. The court ruled that the debtor was not entitled to undue hardship discharge of his debt, but the court, in exercise of its equitable authority to enter “necessary or appropriate” orders, entered an order discharging any student loan debt which debtor was unable to repay following his participation in the Income Contingent Repayment Plan (ICRP) or income-based repayment (IBR) program.


The Bankruptcy Code prohibits the discharge of student loan debts “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).  There is a split amongst the courts on the proper test to apply in determining whether the debtor has satisfied the undue hardship burden. The Brunner Test is a three-part test which requires the debtor to prove: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her 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 has made good faith efforts to repay the loans. Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2nd Cir.1987). Other courts have adopted “the totality of the circumstances test” which requires the court to consider: (1) the debtor’s past, present, and reasonably reliable future financial resources, (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses, and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. Long v. Educ. Credit Mgmt. Corp., 322 F.3d 549, 554 (8th Cir.2003). The Court in this case adopted “the totality of the circumstances test” because it opined the Brunner test to be too expansive.


A. The William D. Ford Direct Loan Program

Prior to the commencement of this case, the court took notice of the William D. Ford Direct Loan Program (the “Ford Program”), which was enacted by Congress pursuant to 20 U.S.C. § 1087a et seq., and is contained within the Code of Federal Regulations, see 34 C.F.R. §§ 685.100 through 685.402. The Ford Program provides for student loan consolidation under the guaranteed student loan program, and an income contingent repayment plan (“ICR Plan”). In addition to ICR Plans, student loan borrowers may be eligible for an Income-Based Repayment program (the “IBR program”) as part of the Ford Program. An understanding of the Ford Program helps to facilitate a complete legal analysis of the Court’s opinion in this case.

Under the ICR Plan, the monthly payment amount is calculated as the lesser of: (a) the amount that would be paid if the borrower repaid the loan in 12 years, multiplied by an annual income percentage factor that varies based upon the borrower’s annual income; or (b) 20% of the borrower’s discretionary income, which is defined as the borrowers adjusted gross income (“AGI”) minus the poverty level for the borrower’s family size.

The IBR Program is part of the College Cost Reduction and Access Act of 2007. Under the IBR Program, the amount an eligible borrower would repay each month under the IBR is based on the Borrower’s AGI and family size. The annual IBR repayment amount is 15% of the difference between the borrower’s AGI and 150% of the Federal HHS Poverty Guidelines, adjusted for family size. That amount is then divided by 12 to get the monthly IBR repayment amount. If that amount is higher than the 10-year standard repayment amount on the borrower’s loans, then the borrower’s required payment is the standard amount. The repayment amount under a 10-year standard plan is calculated based upon the total.

B. Stipulated Facts and the Debtor’s Testimony

Debtor, a native Ethiopian, is 53 years old, divorced, and has no minor children. He filed a Chapter 7 petition in 2010 and listed unsecured creditors holding claims totaling $34,867.91, including Educational Credit Management Corporation (“ECMC”) with a claim totaling $29,925.42.

Debtor has acquired several degrees from various American educational institutions. He received: (1) Associate Degree in Business administration from South Central Community College in New Haven, Connecticut, (2) a Bachelor of Science Degree from Southern Connecticut State University in New Haven, Connecticut, (3) a Masters of Science Degree in Administrative studies from Boston University.

Throughout his adult life, debtor has only held hourly wage jobs, earning no more than nine to ten dollars per hour. Although debtor does not keep records of his expenses, debtor set forth monthly expenses totaling $1,062. In addition to typical monthly expenses, debtor also sends money to his sister to support her and her family in Africa. At the time of this case, debtor has collected unemployment payments of $700 per month for the past nine months. In spite of his unemployment, debtor testified that he has sent out over 600 resumes and job applications in his attempt to find employment suited to his educational level. He testified that his inability to secure employment is due to his accent and racism.

Debtor testified that he will no longer accept employment as a per hour wage earner. He explained that if he accepted such employment “life will never change.” He also testified that he did not apply for a federal loan consolidation through the Ford Program, because he “wanted the Judge to decide the case based on his economic status.”

Debtor contends that repayment of his student loan debts would present an undue hardship because he cannot afford to repay the debt, and he is unlikely able to repay it in the foreseeable future. ECMC argued that debtor failed to sustain his burden, and that he failed to show that his future prospects are bleak enough to warrant the discharge of his student loan debt.


Ultimately, the court found that debtor introduced evidence to suggest hardship; however, debtor did not submit evidence to permit a finding of undue hardship. The court ruled in favor of ECMC holding that debtor was not entitled to undue hardship discharge of his student loan debt. The court found dispositive that due to his advanced degrees the debtor would eventually obtain employment, and that despite his eligibility he did not participate in an ICR Plan or IBR program. However, the court exercised its equitable authority discharging any student loan debt which debtor was unable to repay following his participation in the ICRP Plan or IBR program so as to avoid a negative tax consequences (arising from the negative amortization of the debt over time when payments are not made and the tax implications arising after the debt is cancelled).

Like Hedlund v. Educational Resources Institute, Inc., 468 B.R. 901 (D.Or. 2012), this case demonstrates the discretionary authority of the courts in applying the Brunner "undue hardship" test. In this case, the court found that the second prong of Brunner test had not been met; predominantly the fact that due to debtor's advanced degrees it was likely that he would obtain future employment.


Austin J. Pollak

Summer Associate

Blog By:  Austin J. Pollak  (Austin's bio) of the Schaller Law Firm

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