No. 14-523
IN THE
_________
IN RE ESTUDIANTE, Debtor,
BRIGHT FUTURES EDUCATIONAL CREDIT CORP., Petitioners,
v. SARA ESTUDIANTE,
Respondent. _________
ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE
THIRTEENTH CIRCUIT _________
BREIF OF THE PETITONER
_________
TEAM P1 Counsel of Record Counsel for Petitioners Oral Argument Requested
No. 11-1518
IN THE
Supreme Court of the United States
RANDY CURTIS BULLOCK,Petitioner,
—v.—
BANKCHAMPAIGN, N.A.,Respondent.
ON WRIT OF CERTIORARI TO THE UNITED STATESCOURT OF APPEALS FOR THE ELEVENTH CIRCUIT
BRIEF IN SUPPORT OF RESPONDENT FOR AMICI CURIAEPROFESSORS RICHARD AARON, JAGDEEP S. BHANDARI,
SUSAN BLOCK-LIEB, JOHN COLLEN, JESSICA DAWNGABEL, KENNETH N. KLEE, GEORGE W. KUNEY,
LOIS LUPICA, THERESA J. PULLEY RADWAN, NANCY B. RAPAPORT, MARIE T. REILLY,
KEITH SHARFMAN, AND ROBERT ZINMAN
RICHARD LIEB
RESEARCH PROFESSOR OF LAW
ST. JOHN’S UNIVERSITY
SCHOOL OF LAW
8000 Utopia ParkwayJamaica, New York 11439(212) 479-6020, or(718) [email protected]
Counsel of Record for Amici Curiae ProfessorsJanuary 14, 2013
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Team P1 QUESTIONS PRESENTED
1. Under 11 U.S.C. § 523(a)(8), whether an educational loan discharge requires showing
undue hardship on the debtor and the debtor’s defendants under the totality of the circum-
stances test as adopted by the Court of Appeals for the Thirteenth Circuit?
2. Whether the debtor’s failure to enroll in a Department of Education’s Income Contingent
Repayment Plan, under which no payments would be made and the debt would be can-
celled after 25 years, is dispositive to a finding of undue hardship?
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TABLE OF CONTENTS
QUESTIONS PRESENTED ............................................................................................................ i
TABLE OF CONTENTS ................................................................................................................ ii
TABLE OF AUTHORITIES ......................................................................................................... iv
BRIEF FOR THE PETITIONER.....................................................................................................x
OPINIONS BELOW ........................................................................................................................x
JURISDICTION ..............................................................................................................................x
CONSTITUTIONAL, STATUTORY, AND REGULATORY PROVISIONS INVOLVED ........x
STATEMENT OF THE CASE ........................................................................................................1
SUMMARY OF THE ARGUMENT ..............................................................................................2
ARGUMENT ...................................................................................................................................6
I. This Court Should Reverse The Ruling Of The Court Of Appeals
For The Thirteenth Circuit Because The Brunner Test Embodies
The Aims Of Congress In Creating 11 U.S.C.S. § 523 And Creates
A Consistent Framework For Bankruptcy Courts To Follow.. .....................................8
A. The Brunner test manifests Congress’ objectives in reforming
the bankruptcy laws to protect the educational loan system
and to prevent abuse of the bankruptcy system. ...............................................10
B. The Brunner test has been adopted by nine of the Circuit
Courts of Appeals and offers parties as well as district
courts a predictable and reasonable framework under which
the educational loan system can operate. ..........................................................14
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II. The Court Of Appeals For The Thirteenth Circuit Erred When
It Held The Availability Of An ICRP Is Not Relevant To The
Undue Hardship Inquiry. .. .............................................................................................16
A. Enrollment In The ICRP Is Dispositive To The Good Faith
Inquiry under Brunner. ......................................................................................19
B. Even if enrollment in an ICRP is not dispositive, where a
debtor fails to take any action towards repayment of his
student loans, he cannot satisfy the good faith requirement
as a matter of law. ...............................................................................................23
1. Ms. Estudiante did not maximize her income. ..........................................24
2. Ms. Estudiante did not minimize her expenses. ........................................25
3. Ms. Estudiante did not show good faith by contributing
to her own current financial situation. .....................................................27
C. ICRP and similar programs provide more tailored relief to
student loan debtors than bankruptcy. .............................................................28
CONCLUSION ..............................................................................................................................32
APPENDIX A – OPINION BELOW ............................................................................................ 2a
APPENDIX B
RELEVANT CONSTITUIONAL PROVISIONS ........................................................... 22a
RELEVANT LEGISLATIVE STATUES ....................................................................... 22a
RELEVANT FEDERAL REGULATIONS .................................................................... 24a
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TABLE OF AUTHORITIES
CASES
Andresen v. Nebraska Student Loan Program, Inc. (In re Andresen),
232 B.R. 127 (B.A.P. 8th Cir. 1999) ........................................................................................ 13
Brightful v. Pennsylvania Higher Educ. Assistance Agency,
267 F.3d 324 (3d Cir. 2001)...................................................................................................... 24
Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon),
435 B.R. 791 (B.A.P. 1st Cir. 2010) ......................................................................................... 14
Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) ................ 9, 10, 14
Carcieri v. Salazar, 555 U.S. 379 (2009) ..................................................................................... 10
Dep't of Mental Health v. Shipman (In re Shipman),
33 B.R. 80 (Bankr. W.D. Mo. 1983) ........................................................................................... 7
Dodd v. United States, 545 U.S. 353 (2005) ................................................................................. 10
Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour),
433 F.3d 393 (4th Cir. 2005) ............................................................................................. passim
Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009) ...................... 17, 18, 19, 23
Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302 (10th Cir. 2004) ................................. passim
Educ. Credit Mgmt. Corp. v. Waterhouse, 333 B.R. 103 (W.D.N.C. 2005) ................................ 25
Educ. Credit Mgmt. Corp., v. Mosko, 322 F.3d 549 (8th Cir. 2003) ............................................ 27
Gallagher v. Educ. Credit Mgmt. Corp. (In re Gallagher),
333 B.R. 169 (Bankr. D.N.H. 2005) ......................................................................................... 15
Goulet v. Educ. Credit Mgmt. Corp., 284 F.3d 773 (7th Cir. 2002) ............................................. 23
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Team P1 Grogan v. Garner, 498 U.S. 279 (1991) ......................................................................................... 7
Gustafson v. Alloyd Co., 513 U.S. 561 (1995) .............................................................................. 11
Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238 (11th Cir. 2003) ....................... 13, 14
In re Ames Dep’t Stores, Inc., 582 F.3d 422 (2d Cir. 2009) ........................................................... 7
In re Burkhead, 304 B.R. 560 (Bankr. D. Mass. 2004) ................................................................ 19
In re Chasser, 391 B.R. 482 (Bankr. M.D. Fla. 2008) ................................................................. 19
In re Craig, 579 F.3d 1040 (9th Cir. 2009) .................................................................................. 28
In re Ekensai, 325 F.3d 541 (4th Cir. 2003) ........................................................................... 22, 23
In re Goodman, 449 B.R. 287 (Bankr. N.D. Ohio 2011) .............................................................. 19
In re Grant, 398 B.R. 205 (Bankr. N.D. Ohio 2008) .................................................................... 23
In re Hornsby, 144 F.3d 433 (6th Cir. 1998) ................................................................................ 29
In re Marcotte, 455 B.R. 460 (Bankr. D.S.C. 2011) ............................................................... 23, 25
In re Miller, No. 3:05-CV, 2005 WL 2127931,
at *3 (E.D. Tenn. Aug. 31, 2005) .............................................................................................. 28
In re Momentum Mfg. Corp., 25 F.3d 1132 (2d Cir. 1994) ............................................................ 7
In re Mosely, 494 F.3d 1320 (B.A.P. 10th Cir. 2009) ...................................................... 23, 24, 29
In re Mosko, 515 F.3d 319 (4th Cir. 2008) ....................................................................... 17, 25, 28
In re Plunkett, 82 F.3d 738 (7th Cir. 1996) .................................................................................. 15
In re Roberson, 999 F.2d 1132 (7th Cir. 1993) ...................................................................... 14, 23
In re Smither, 194 B.R. 102 (Bankr. W.D. Ky. 1996) .................................................................... 9
In re Tirch, 409 F.3d 677, 682 (6th Cir. 2005) ................................................................. 17, 18, 23
Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882 (7th Cir. 2013) ............................... 22, 26, 27
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Long v. Educ. Credit Mgmt. Corp. (In re Long),
322 F.3d 549 (8th Cir. 2003) ......................................................................................... 9, 11, 14
Marrama v. Citizens Bank, 549 U.S. 365 (2007) ............................................................................ 7
Nash v. Conn. Student Loan Found. (In re Nash), 446 F.3d 188 (1st Cir. 2006) ......................... 14
O’Hearn v. Educ. Credit Mgmt. Corp., 339 F.3d 559 (7th Cir. 2003) ................................... 23, 25
Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler),
397 F.3d 382 (6th Cir. 2005) .............................................................................................. 14, 23
Pa. Higher Educ. Assistance Agency v. Faish (In re Faish),
72 F.3d 298 (3d Cir. 1995).................................................................................................. 11, 14
Pierce v. Underwood, 487 U.S. 552 (1988) .................................................................................. 15
Rhodes v. Conn. Student Loan Fund (In re Rhodes),
418 B.R. 27 (Bankr. D. Conn. 2009) ........................................................................................ 19
Roth v. Educ. Credit Mgmt. Corp. (In re Roth),
490 B.R. 908 (B.A.P. 9th Cir. 2013) .............................................................................. 8, 23, 28
U.S. Dep't of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89 (5th Cir. 2003) ........................... 14
United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assoc., Ltd.
(In re Timbers of Inwood Forest), 484 U.S. 365 (1988) .......................................................... 11
United States Dep't of Health & Human Services v. Smith,
807 F.2d 122 (8th Cir. 1986) ...................................................................................................... 7
United States v. Fox, 95 U.S. 670 (1877) ....................................................................................... 6
United States v. Gonzales, 520 U.S. 1 (1997) ............................................................................... 10
United Student Aid Funds, Inc. v. Pena (In re Pena),
155 F.3d 1108 (9th Cir. 1998) .................................................................................................. 14
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Wirtz v. Bottle Blowers Ass’n, 389 U.S. 463 (1968) ..................................................................... 10
Woody v. DOJ (In re Woody), 345 B.R. 246 (B.A.P. 10th Cir. 2006) .......................................... 16
Wright v. Union Cent. Life Ins. Co., 304 U.S. 502 (1938) .............................................................. 6
Zook v. EDfinancial Corp. (In re Zook),
2009 Bankr. LEXIS 788 (Bankr. D.D.C. Feb. 27, 2009) .......................................................... 14
STATUTES
11 U.S.C.S. § 727(b) (Lexis 2014) ................................................................................................. 7
20 U.S.C.S. § 1087a (Lexis 2014) ................................................................................................ 20
20 U.S.C.S. § 1087e (Lexis 2014) .......................................................................................... 17, 20
26 U.S.C.S. § 108 (Lexis 2014) .................................................................................................... 29
REGULATIONS
34 C.F.R. § 685.204 (2010) .......................................................................................................... 20
34 C.F.R. § 685.205 (2010) .......................................................................................................... 21
34 C.F.R. § 685.208 (2010) .......................................................................................................... 20
34 C.F.R. § 685.209 (2010) ........................................................................................ 17, 21, 27, 30
34 C.F.R. § 685.212 (2010) .......................................................................................................... 20
34 C.F.R. § 685.219 (2010) .......................................................................................................... 21
CONSTITUTIONAL PROVISIONS
U.S.C.S. Const. Art. I, § 8, Cl 4 ...................................................................................................... 6
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CONGRESSIONAL ACTS
Bankruptcy Act of 1898, amendments., Pub. L. No. 76-423, 54 Stat. 40 ...................................... 6
Bankruptcy Amendments and Federal Judgeship Act of 1984,
Pub. L. No. 98-353, 98 Stat. 333 ................................................................................................ 6
Bankruptcy Judges, U.S. Trustees, and Family Farmer Bankruptcy Act of 1986,
Pub. L. No. 99-554, 100 Stat. 3088 ............................................................................................ 6
Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 ........................................ 6
Bankruptcy Tax Act of 1980, Pub. L. No. 96-589, 94 Stat. 3389 .................................................. 6
Higher Education Amendments of 1992, Pub. L. No. 102-325, 106 Stat. 448 ................ 15, 17, 20
Retiree Benefits Bankruptcy Protection Act of 1988, Pub. L. No. 100-334, 102 Stat. 610 ........... 6
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. No. 109-8, 119 Stat. 23 ............................................................................................ 6, 21
Title 11, U.S.C., bankruptcy., Pub. L. No. 95-598, 92 Stat. 2549 .................................................. 6
LEGISLATIVE HISTORY
H.R. Rep. No. 595, 95th Cong., 1st Sess. 384 (1977) .................................................................... 7
H.R. Rep. No. 595, 95th Cong., 2d Sess. 133 ............................................................................... 12
Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 137,
93rd Cong., 1st Sess. (1973) ..................................................................................... 7, 12, 13, 27
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OTHER AUTHORITIES
Table C, Administrative Office of the U.S. Courts, Federal Judicial Caseload Statistics,
http://www.uscourts.gov/Statistics/
FederalJudicialCaseloadStatistics/caseload-statistics-2014.aspx. ............................................ 21
Table F, Administrative Office of the U.S. Courts, Bankruptcy Statistics,
http://www.uscourts.gov/Statistics/BankruptcyStatistics/
2014-bankruptcy-filings.aspx ................................................................................................... 21
Table F-2, Administrative Office of the U.S. Courts, Bankruptcy Statistics,
http://www.uscourts.gov/Statistics/BankruptcyStatistics/
2014-bankruptcy-filings.aspx. .................................................................................................. 21
William C. Whitford, The Ideal of Individualized Justice: Consumer Bankruptcy as Consumer
Protection, and Consumer Protection in Consumer Bankruptcy,
68 Am. Bankr. L.J. 397 (1994). ................................................................................................ 28
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Team P1 BRIEF FOR PETITIONER
Petitioner Bright Futures Educational Loan Corporation respectfully requests this Court
reverse the decision of the United States Court of Appeals for the Thirteenth Circuit.
OPINIONS BELOW
The Opinion of Court of Appeals for the Thirteenth Circuit is unreported, but is attached
as Petitioner’s Appendix A from page 2a to 21a.
The Opinion of the District Court for the District of Moot is unreported, and unavailable
for attachment.
JURISDICTION
The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.
CONSTITUTIONAL, STATUTORY, AND REGULATORY PROVISIONS INVOLVED
The relevant constitutional, statutory, and regulatory provisions involved are set forth
below and attached as Petitioner’s Appendix B from page 22a to 28a.
Const. Art. I, § 8, Cl. 4.
11 U.S.C. § 523, 727(b).
20 U.S.C. § 1087a, 1087e.
26 U.S.C. § 108
34 C.F.R. § 685.204, 685.205, 685.208, 685.209, 685.212, 685.219.
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Team P1 STATEMENT OF THE CASE
Statement of Facts
Twenty years ago, Sara Estudiante (“Ms. Estudiante”) left her full time position as a sales
clerk at Mallmart in order to attend college at Moot State. R. at 4. As many individuals do
seeking a college education, Ms. Estudiante applied and received a loan under the William D.
Ford Direct Loan Program. R. at 4. The servicer of the loan became Bright Futures Educational
Credit Corporation (“Bright Futures”). R. at 5. At the time Ms. Estudiante enrolled in Moot State
she was married to her husband with one child, at three months old. R. at 4. Ms. Estudiante did
not maintain employment during her time in college and was supported entirely by her husband.
R. at 4. During Ms. Estudiante’s junior year, her husband became ill and could not continue to
support the family. R. at 4. Unfortunately, a year later Ms. Estudiante’s husband passed away,
which left Ms. Estudiante to deal with unpaid medical bills and family expenses. R. at 4.
Consequentially, Ms. Estudiante left school to return to her full time job at Mallmart as a
sales clerk. R. at 4. Thereafter, continuing to work full time, Ms. Estudiante did not make any
payments, deferments, or forbearances on her student loans. R. at 4, 5. At the time Ms.
Estudiante left college she owed $24, 000 in student loans under the William D. Ford Direct
Loan Program. R. at 4. Years have passed since Ms. Estudiante left college carrying the debt of
the student loan she received. R. at 5. Currently she falls below the poverty line, while her debts
continued to accrue interest, totaling at $48,000. R. at 5. Her children have now grown and are
no longer dependent upon her and Ms. Estudiante is in good health. R. at 5. She continues to
work at Mallmart where she is not in danger of losing her job. R. at 5.
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Team P1 Bright Future’s attempted to communicate with Ms. Estudiante to inform her about her
repayment option under the Income Contingent Repayment Plan (“ICRP”). R. at 5. Under this
plan, Ms. Estudiante would be required to make no monthly payments towards her loan, so long
as she continued to make the same income, and would be canceled after 25 years. R. at 5. Ms.
Estudiante never acknowledged the offer. R. at 5. Despite a number of financial hardships she
encountered, such as foreclosure on her home, cut wages and benefits at work, Ms. Estudiante
did not attempt to communicate with Bright Futures about her situation. R. at 4, 5, 6. Rather, Ms.
Estudiante filed a petition in bankruptcy under chapter 7 of the Bankruptcy Code. R. at 6.
Procedural History
Ms. Estudiante filed for Chapter 7 bankruptcy in the Bankruptcy Court for the District of
Moot. R. 6. In pursuit of the bankruptcy, she filed an adversary proceeding against her
educational loan servicer Bright Futures seeking a determination that her student loans were
dischargeable under 11 U.S.C.S. § 523(a)(8). A bench trial on the proceeding was held in the
Bankruptcy Court in the District of Moot and found for Ms. Estudiante. R. at 6. Bright Futures
appealed to the District Court limiting the appeal to the legal issues it had raised below. R. at 6.
The District Court then found that Ms. Estudiante cannot receive a discharge as a matter of law.
R at 6. Ms. Estudiante appealed to the Court of Appeal for the Thirteenth Circuit. R. at 6. The
Thirteenth Circuit found for Ms. Estudiante and reversed the ruling of the District Court. R. at
14. Bright Futures has appealed to this Court. R. at 1.
SUMMARY OF THE AURGUMENT
The educational loan system and loan servicers like Bright Futures Educational Credit
offer the opportunity for higher education to an entire class of citizens in this country for whom
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Team P1 it would otherwise be cost prohibitive. Governmental guarantees can only go so far to protect
private loan servicers who offer loans based not on creditworthiness, but on opportunity and
future possible income. When graduates file for bankruptcy, it is up to the judicial system to
protect this opportunity for millions from the bad acts of the few. Without that protection and
predictability, it would be much harder for the government to induce private loan servicers to
offer loans of this type.
Congress has shown the determination to protect this system with its passage of 11
U.S.C. § 523(a)(8), which excepts all federally guaranteed loans from discharge. The only way
around this exception is for debtors to prove that excepting their student loans from discharge
would create an “undue hardship” on them or their dependents. Despite not defining “undue
hardship” in Title 11, Congress adopted the phrase directly from a commission report, which laid
out the aims behind the exception and the burden on the debtors to prove “undue hardship.”
These principles are encapsulated by the Brunner test, which was created by the Second Circuit
Court of Appeals.
Even if some who file for bankruptcy do deserve the ability to get out from under these
loans, there needs to be predictability and order to how these discharges come. These loan
servicers accept the fact that they will have to write off some loans as part of this venture.
However, these servicers depend on uniform court rulings to accurately calculate their exposure.
The Brunner test, which has been embraced by nine of the Courts of Appeals, gives bankruptcy
courts an analytical framework to weigh the various factors relevant in the undue hardship
determination, and arrive at more consistent and predictable outcomes. In addition, the
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Team P1 bankruptcy system benefits from the Brunner test through efficiencies in the adversarial
proceedings.
One requirement of the Brunner test is that debtors have shown good faith with their
student loans up to the point of filing for bankruptcy. This is easier than ever for debtors who
may be in financial distress now because they can show good faith without being required to
make any payments on their loans. Congress has created the ICRP with the aim of allowing those
who are in unfortunate situations to pay what they can when they can based on their income and
the federal poverty level. This plan allows for cancelation of the debtors loans after twenty-five
years even if they have been ineligible to make one payment under the plan. The only burden on
the debtor is communication with their loan servicer to relay their situation and enroll in the plan.
Without this modicum of effort on the part of debtors, good faith cannot be found in their case.
However, even if this Court does not find enrollment in the ICRP dispositive, it should
make debtors who fail to take any action to make good on their student loans ineligible for
discharge as a matter of law. A student loan is a mortgage on the future of a debtor, and is not
given based on current creditworthiness, but on potential future income. As such, the Department
of Education and private loan servicers rely on debtors to maximize their income potential to the
best of their ability, minimize their expenses, and apply their economic surpluses towards their
debts. By doing so, they are fulfilling their obligation in taking out these loans to pursue a higher
education degree. Holding these debtors to that obligation allows the educational loan system to
function as Congress intended, and should be the minimum requirement to show good faith as a
matter of law.
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Team P1 Finally, bankruptcy is not a system created for or tailored to the issue of student loans. It
is a system—especially in Chapter 7—primarily built around commercial debts and providing
those who have fallen on hard times a fresh start. The reason Congress has excepted student
loans from discharge in bankruptcy is that there are specifically tailored tools for those who are
having difficulty with their loans. These tools—like the ICRP—are better suited to help these
debtors out of their situation without the social stigma of bankruptcy. In addition, these
alternatives do not ask bankruptcy judges to try to predict the future, something the failure rate of
Chapter 13 plans show these judges do poorly.
For the foregoing reasons, this Court should reverse the ruling of the Court of Appeals for
the Thirteenth Circuit.
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Team P1 ARGUMENT
The power to regulate bankruptcy proceedings in the United States was vested in
Congress in the Constitution. U.S.C.S. Const. Art. I, § 8, Cl 4 (Lexis 2014). This Court has long
stated that the power given to Congress to regulate the bankruptcy system is supreme. United
States v. Fox, 95 U.S. 670, 672 (1877). In addition, this Court has established that Congress has
the power to override common contract and property law to allow bankruptcy courts to have
sufficient authority to fashion remedies to each individual circumstance. Wright v. Union Cent.
Life Ins. Co., 304 U.S. 502, 513 (1938).
In putting these powers to use, Congress first enacted the Bankruptcy Act of 1898 (the
“Act”), which stood as law for eighty years, with amendments, before being reformed by
Congress into the Bankruptcy Code (the “Code”) through the Bankruptcy Reform Act of 1978.
See Bankruptcy Act of 1898, amendments., Pub. L. No. 76-423, 54 Stat. 40; Title 11, U.S.C.,
bankruptcy., Pub. L. No. 95-598, 92 Stat. 2549. The Code has been amended substantively six
times since its enactment in 1980, 1984, 1986, 1988, 1994, and 2005. See Bankruptcy Tax Act of
1980, Pub. L. No. 96-589, 94 Stat. 3389; Bankruptcy Amendments and Federal Judgeship Act of
1984, Pub. L. No. 98-353, 98 Stat. 333; Bankruptcy Judges, U.S. Trustees, and Family Farmer
Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088; Retiree Benefits Bankruptcy
Protection Act of 1988, Pub. L. No. 100-334, 102 Stat. 610; Bankruptcy Reform Act of 1994,
Pub. L. No. 103-394, 108 Stat. 4106; The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23.
The Act did not protect educational loans from discharge, which resulted, “millions of
dollars in federally guaranteed loans defaulted on annually.” United States Dep't of Health &
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Team P1 Human Services v. Smith, 807 F.2d 122, 126 (8th Cir. 1986) (citing Dep't of Mental Health v.
Shipman (In re Shipman), 33 B.R. 80, 82 (Bankr. W.D. Mo. 1983)). In remodeling the
bankruptcy laws in 1978, this Court recognized the reforms “reflect[ed] a Congressional decision
to exclude from the general policy of discharge . . . certain unpaid educational loans.” Grogan v.
Garner, 498 U.S. 279, 287 (1991). Congress created the Commission on the Bankruptcy Laws of
the United States (the “Commission”), which, in 1973, filed its report to Congress, much of
which forms the backbone of the current bankruptcy laws. Report of the Commission on the
Bankruptcy Laws of the United States, H.R. Doc. No. 137, 93rd Cong., 1st Sess. (1973)
reprinted in B-4c Collier on Bankruptcy App. Pt. 4(c) (the “Commission Report”).
This Court has stated often that, “[t]he principal purpose of the Bankruptcy Code is to
grant a fresh start to the honest but unfortunate debtor.” Marrama v. Citizens Bank, 549 U.S.
365, 367 (2007) (citations omitted). This “fresh start” is embraced in the Code through the idea
of the discharge. H.R. Rep. No. 595, 95th Cong., 1st Sess. 384 (1977). Under § 727(b) of the
Code, a discharge in a Chapter 7 case, such as the instant case, absolves the debtor from personal
liability on all debts, “that arose before the date of the order for relief under this chapter,” unless
the debts are excepted under § 523. 11 U.S.C.S. § 727(b) (Lexis 2014).
This Court reviews conclusions of law de novo. In re Ames Dep’t Stores, Inc., 582 F.3d
422, 426 (2d Cir. 2009). Conclusions of fact are reviewed for clear error. In re Momentum Mfg.
Corp., 25 F.3d 1132, 1136 (2d Cir. 1994). The facts are uncontested in this case. R. at 7.
Therefore, this Court should review the legal conclusions of the Thirteenth Circuit de novo.
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Team P1 I. This Court should reverse the ruling of the Court of Appeals for the Thirteenth
Circuit because the Brunner test embodies the aims of Congress in creating
11 U.S.C.S. § 523 and creates a consistent framework for bankruptcy courts to
follow.
To give judges full discretion in determining the fate of each educational loan that passes
through the bankruptcy system would radically alter the desire of lenders to provide these vital
loans. Section 523 lists certain types of debt that are nondischargable under any chapter of the
Code even if the debtor receives a discharge. 11 U.S.C.S. § 523. Within these exceptions, the
Code does not allow for the discharge of educational loans that were insured or guaranteed by a
governmental unit without proof from the debtor of “undue hardship.” 11 U.S.C.S. § 523(a)(8).
The burden of proof for this exception is bifurcated. Roth v. Educ. Credit Mgmt. Corp. (In re
Roth), 490 B.R. 908, 916 (B.A.P. 9th Cir. 2013).
First, the creditor must prove, “the existence of the debt and that the debt is an
educational loan within the statue’s parameters.” Id. The definition of the term “educational
loan” under the statue is expansive, encompassing all, “educational benefit[s] or loan[s] made,
insured, or guaranteed . . . under any program funded in whole or in part by a governmental unit .
. . or an obligation to repay funds received as an educational benefit.” 11 U.S.C.S. §
523(a)(8)(A).
Following this showing, the burden shifts to the debtor to prove the “undue hardship”
under § 523, if the debtor wishes to receive a discharge. This is true under both the Brunner and
totality of the circumstances tests that currently exist. See Brunner v. N.Y. State Higher Educ.
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Team P1 Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987); Long v. Educ. Credit Mgmt. Corp. (In re Long),
322 F.3d 549, 554 (8th Cir. 2003).
In the totality of the circumstances test adopted by the Thirteenth Circuit Court of
Appeals, no one factor is dispositive, and the court must weigh as many as eleven or more
factors in determining whether the exception would create an “undue hardship.” Educ. Credit
Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004) (citing In re Smither, 194 B.R.
102, 111 (Bankr. W.D. Ky. 1996)). One court stated that in order to correctly “make this
determination, at a minimum, a court should consider,” the amount of debt involved; the current
income of the debtor, objecting creditor, and spouses; the current expenses of the debtor,
objecting creditor, and spouses; the current assets, including the exempt assets of the debtor,
objecting creditor, and spouses; the current liabilities, excluding those discharged of the debtor,
objecting creditor, and spouses; the health, job skills, training, age, and education of the debtor,
objecting creditor, and spouses; the dependents of the debtor, objecting creditor, and spouses,
their ages and any special needs they may have; any changes in financial condition due to the
divorce of the debtor, objecting creditor, and spouses; the amount of debt discharged in the
bankruptcy; whether the objecting creditor is eligible for relief otherwise; and whether the parties
have acted in good faith. Id. The court goes on to add that “[t]his list of factors is by no means
exclusive . . . .” Id.
Under the Brunner test, things are much simpler. The debtor must show that three factors
exist in conjunction to receive relief. Brunner, 831 F.2d at 396. First, the debtor must show that,
“[he] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for
herself and her dependents if forced to repay the loans.” Id. Second, the debtor must show, “that
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additional circumstances exist indicating that this state of affairs is likely to persist for a
significant portion of the repayment period.” Id. Finally, the debtor must show, “that [he] has
made good faith efforts to repay the loans [before bankruptcy].” Id.
The Brunner test allows for a consistent and predictable bankruptcy process, and
reflects the intentions of Congress in creating the exemption to discharge; and therefore, this
Court should reverse the Court of Appeals and adopt the Brunner test to determine “undue
hardship.”
A. The Brunner test manifests Congress’ objectives in reforming the
bankruptcy laws to protect the educational loan system and to prevent abuse
of the bankruptcy system.
This case, and the difference between these two tests, really comes down to understand-
ing the meaning behind the phrase “undue hardship” in § 523. However, Congress did not define
“undue hardship” in the Code, and therefore has left it to the courts to determine its meaning
under the law. The principles of statutory construction are well settled by this Court. Carcieri v.
Salazar, 555 U.S. 379, 387 (2009). First, courts must determine whether the text of the statute is
plain and unambiguous. Id. (citing United States v. Gonzales, 520 U.S. 1, 4 (1997)). If it is, then
the statue must be applied as it is written. Id. (citing Dodd v. United States, 545 U.S. 353, 359
(2005)).
However, if the statute is ambiguous, this Court has permitted the use of the legislative
history to frame the statute and understand the intent of Congress. Wirtz v. Bottle Blowers Ass’n,
389 U.S. 463, 468 (1968) (“proper construction frequently requires consideration of [a statute’s]
wording against the background of its legislative history and in the light of the general objectives
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Congress sought to achieve.”). In addition, this Court before has employed using legislative
history to discover of the meaning of specific statutory language that is unclear. Gustafson v.
Alloyd Co., 513 U.S. 561, 581-82 (1995) (legislative history supports reading of “prospectus” in
Securities Act as being limited to initial public offerings). These principles have been applied to
the Code as well to help determine the meaning of ambiguous sections. United Sav. Ass’n of Tex.
v. Timbers of Inwood Forest Assoc., Ltd. (In re Timbers of Inwood Forest), 484 U.S. 365, 371
(1988). Under Timbers, references may be made to the legislative history of the statute as well as
to the phrase’s place in the statute as a whole. Id.
Therefore, under this framework, the first step is to determine if the language of the
statute is ambiguous. The language of § 523 has come before eleven courts of appeals including
this case, and each of them have found the fact that the term “undue hardship” is undefined to
make the statue ambiguous. See, e.g., Pa. Higher Educ. Assistance Agency v. Faish (In re Faish),
72 F.3d 298, 302 (3d Cir. 1995) (“the "undue hardship" exception of § 523(a)(8)(B) [now §
523(a)(8)] is difficult to apply because the drafters of the Bankruptcy Code did not define undue
hardship.”); Polleys, 356 F.3d at 1306 (“[t]he bankruptcy code does not define "undue hardship .
. . "); Long, 322 F.3d at 554 (“[t]he Bankruptcy Code does not define the phrase and courts have
struggled with its meaning.”).
As “undue hardship” is ambiguous, this Court may consult the legislative history of the
statute to determine the specific meaning of the phrase. Congress recognized in reforming the
Act that educational loans were different from others, stating, “They are made without business
considerations, without security, without cosigners, and relying for repayment solely on the
debtor's future increased income resulting from the education. In this sense, the loan is viewed as
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a mortgage on the debtor's future.” H.R. Rep. No. 595, 95th Cong., 2d Sess. 133, reprinted in
1978 U.S. Code Cong. & Ad. News 5963, 6094.
Therefore, they made an exception to the general policy of discharge, allowing debtors to
discharge student loans under “undue hardship,” a phrase they took verbatim from the
Commission report. Commission Report, Pt. II § 4-506. In that same report, the Commission
referred to, “[the] rising incidence of consumer bankruptcies of former students motivated
primarily to avoid payment of educational loan debts,” as justification for the exception to
discharge. Id. In addition, the typical Chapter 7 bankruptcy student has little to no exempt
property that will be paid out to creditors. Polleys, 356 F.3d at 1306. The Commission also
created a template for determining whether the debt would pose an “undue hardship,” allowing
undue hardship exception, stating,
(1) the rate and amount of his future resources should be estimated
reasonably in terms of ability to obtain, retain, and continue
employment and the rate of pay that can be expected. (2) Any
unearned income or other wealth which the debtor can be expected
to receive should also be taken into account. The total amount of
income, its reliability, and the periodicity of its receipt should be
adequate to maintain the debtor and his dependents, at a minimal
standard of living within their management capability, as well as to
pay the education debt.
Commission Report, at 4-711 (numbering added).
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It is clear from this report, which forms much of the backbone of the Code, and
statements made by Congress that a higher standard of hardship was intended for the undue
hardship exemption. Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238, 1243 (11th Cir.
2003). Finally, the Commission added the good faith prong when it stated that the discharge is
only fair in situations where the debtor is unable to repay his debts due to “factors beyond his
reasonable control.” Commission Report, at 4-506. When the good faith clause is added to the
two prongs offered by the Commission and adopted by Congress above, the Brunner test is
formed.
Therefore, in enacting § 523(a)(8), Congress aimed to protect a student loan system that
allows “a person to earn substantially greater income over his working life[, who] should not as a
matter of policy be [allowed to] discharge [the loan] before he has demonstrated that for any
reason he is unable to earn sufficient income to maintain himself and his dependents and to repay
the educational debt.” Andresen v. Nebraska Student Loan Program, Inc. (In re Andresen), 232
B.R. 127, 137 (B.A.P. 8th Cir. 1999). Also, by creating such an expansive definition for
“educational loan” in the Code when the Act did not protect these loans at all shows significant
evidence that Congress meant to have the courts take this exception to discharge seriously. These
are exactly the protections that are stated in the Commission Report and manifested in the
Brunner test, and therefore this Court should adopt it.
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B. The Brunner test has been adopted by nine of the Circuit Courts of Appeals
and offers parties as well as district courts a predictable and reasonable
framework under which the educational loan system can operate.
The Brunner test has been adopted by the Second, Third, Fourth, Fifth, Sixth, Seventh,
Ninth, Tenth, and Eleventh Circuit Court of Appeals. See Brunner, 831 F.2d at 396; Faish, 72
F.3d at 306; Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 400 (4th Cir.
2005); U.S. Dep't of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003); Oyler
v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); In re Roberson,
999 F.2d 1132, 1135 (7th Cir. 1993); United Student Aid Funds, Inc. v. Pena (In re Pena), 155
F.3d 1108, 1112 (9th Cir. 1998); Polleys, 356 F.3d at 1309; Hemar Ins. Corp. of Am. v. Cox (In
re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003). In addition, the District of Columbia Circuit
Court of Appeals has not addressed the issue, but the bankruptcy court for the District of
Columbia has adopted the Brunner test. See Zook v. EDfinancial Corp. (In re Zook), 2009 Bankr.
LEXIS 788 (Bankr. D.D.C. Feb. 27, 2009).
On the other hand, the only Court of Appeals to adopt the totality of the circumstances
test prior to the Thirteenth Circuit was the Eighth Circuit. Long, 322 F.3d at 554. Finally, the
First Circuit Court of Appeals has not addressed the issue, but the First Circuit B.A.P. has
adopted the totality of the circumstances test. See Nash v. Conn. Student Loan Found. (In re
Nash), 446 F.3d 188, 190 (1st Cir. 2006); but see Bronsdon v. Educ. Credit Mgmt. Corp. (In re
Bronsdon), 435 B.R. 791, 800 (B.A.P. 1st Cir. 2010). However, the bankruptcy court for the
District of New Hampshire still applies the Brunner test, despite the adoption of the totality test
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by the First Circuit B.A.P. See Gallagher v. Educ. Credit Mgmt. Corp. (In re Gallagher), 333
B.R. 169, 173 (Bankr. D.N.H. 2005).
While adoption by a majority of the Courts of Appeals is not in itself binding, this Court
has found the statutory interpretation adopted by a “vast majority of other Courts of Appeals that
have addressed the issue” to be persuasive. Pierce v. Underwood, 487 U.S. 552, 567 (1988). In
addition, Congress implicitly approved the Brunner test when it went back and edited the statue.
This Court has stated that when Congress reenacts a statue and leaves the language that is subject
to judicial interpretation unaltered, Congress implicitly endorses the judicial interpretation.
Pierce, 487 U.S. at 567 (reenactment of “a statute that had in fact been given a consistent judicial
interpretation . . . generally includes the settled judicial interpretation”). Here, Congress has
amended the statue four times over the thirty years that have passed since the ruling in Brunner.
They have made changes to the statue including removing the five-year hardship limitation;
which, if anything, has made the undue hardship exception harder to invoke. Higher Education
Amendments of 1998, Pub. L. No. 105-244, 106 Stat. 448.
Finally, the totality of the circumstances test can, in fact, be tougher on debtors
depending on which of the factors the court wishes to weigh more heavily. When it comes to the
totality of the circumstances test, courts can choose from such a multitude of standards and apply
them in any way. Polleys, 356 F.3d at 1309. Courts need to consider by precedent an ever-longer
list of factors to apply for and against the debtor. Id. These “laundry lists”—such as the one
presented above—of factors “imagin[e] what could be relevant but . . . flunk the test of utility.”
Id. (citing In re Plunkett, 82 F.3d 738, 741 (7th Cir. 1996)).
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In fact, the Brunner test allows courts to consider all the same relevant factors in a more
structured and predictable way. The first and second prongs of Brunner allow courts to consider
many, if not all, of the same relevant factors as the totality of the circumstances test to create an
individualized determination of the debtor’s ability to pay now and in the future. Id. The first
prong of Brunner includes looking at the debtor’s health, skill level, age, and education. Woody
v. DOJ (In re Woody), 345 B.R. 246, 253 (B.A.P. 10th Cir. 2006). In addition, the second prong
of Brunner involves looking at the debtor’s ability to provide adequate shelter, healthcare,
nutrition for himself. Id.
Despite encapsulating the many of the same factors as the totality of the circumstances
approach, the Brunner test is grounded in Congressional purpose. It does this by denoting that
the burden is on the debtor and makes him prove he cannot maintain a minimal standard of living
and this “mortgage on the debtor’s future” should be discharged. Polleys, 356 F.3d at 1310
(citing Commission Report, at 4-710). It also provides these factors to bankruptcy judges in a
structured and predictable system. This duality of Brunner representing both the aims of
Congress in creating the fresh start for the debtor, while also protecting the student loan system
makes it the test this Court should adopt to determine undue hardship.
II. The Court of Appeals for the Thirteenth Circuit erred when it held the availability
of an ICRP is not relevant to the undue hardship inquiry.
The Court should reverse the judgment of the Thirteenth Circuit because Ms. Estudiante
failed to show a good faith effort to repay her loan, and therefore is not eligible for relief under
the Brunner test. The good faith prong is guided by the notion that the debtor’s bad financial
condition should not have been caused by the debtor’s own willfulness or negligence, but rather
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by factors beyond the debtor’s control. See, e.g., Polleys, 356 F.3d at 1302; In re Mosko, 515
F.3d 319 (4th Cir. 2008); Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009).
By not enrolling in an ICRP, a debtor does not make the effort required to meet the good faith
prong. In re Tirch, 409 F.3d 677, 682 (6th Cir. 2005). Even if the Brunner test is not adopted by
this Court, the availability of an ICRP must be considered when determining the undue hardship
upon a debtor under 11 U.S.C. § 523(a)(8). Id.
The ICRP is the most generous plan made available to eligible debtors. Jesperson, 571
F.3 at 781. In the Higher Education Amendments of 1992, Pub. L. No. 102-325, 106 Stat. 448,
Congress delegated the authority to the Department of Education to create flexible repayment
plans for students. 1 The ICRP allows the debtor to make monthly payments on his student loans
based on his yearly income, and explicitly limits the capitalization of unpaid interest on student
debt to ten percent. 34 C.F.R. § 685.209(c)(5) (2010). The payments under the ICRP are limited
to twenty percent of the difference between the debtor’s annual income and the poverty level as
defined by the Internal Revenue Service (“IRS”) 34 C.F.R. § 685.209. The creation of ICRP
indicates Congress’s aim to provide student loan debtors an option outside of bankruptcy for
financial relief.
1 20 U.S.C.S. § 1087e(d)(1). The current code states, “[c]onsistent with criteria established by the Secretary, the
Secretary shall offer a borrower of a loan made under this part a variety of plans for repayment of such loan,
including principal and interest on the loan. The borrower shall be entitled to accelerate, without penalty, repayment
on the borrower’s loans under this part. The borrower may choose – an income contingent repayment plan, with
varying annual repayment amounts based on the income of the borrower, paid over an extended period of time
prescribed by the Secretary, not to exceed 25 years, except that the plan described in this subparagraph shall not be
available to the borrower of a Federal Direct PLUS loan made on behalf of a dependent student.”
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The failure to enroll in an ICRP is relevant to the undue hardship analysis because it is
probative of a lack of good faith. In re Tirch, 409 F.3d at 682. The good faith inquiry questions
the conduct of the debtor before bankruptcy, thus the non-enrollment in an available ICRP is
indicative of good faith. Secondly, the good faith inquiry aids courts in the carrying out of the
Congressional aim in treating student debtors differently than other individuals. And finally if
enrollment in an ICRP were dispositive, it would provide great relief for bankruptcy judges
dealing with these difficult questions of law and fact.
Even if enrollment in an ICRP is not dispositive to the good faith inquiry, Ms. Estudiante
is a vehicle for the court to carry this notion that the ICRP should at least be discussed with more
weight in these cases. Because of Ms. Estudiante’s lack of demonstrating any good faith effort to
repay her loans, this would be an ideal instance to note that the good faith inquiry is probative of
the entire undue hardship question.
This Court should reverse the decision of the Thirteenth Circuit because the enrollment in
an ICRP is dispositive to the good faith question under Brunner; even if enrollment in an ICRP is
not dispositive, where a debtor fails to take any action towards repayment of his student loans, he
cannot satisfy the good faith requirement as a matter of law; and the ICRP and similar programs
provide more tailored relief to student loan debtors than bankruptcy.
A. Enrollment In The ICRP Is Dispositive To The Good Faith Inquiry under
Brunner.
The good faith question extends to the debtor’s conduct before bankruptcy and his failure
to enroll in an available repayment plan illustrations a lack of intention to repay the loan.
Jesperson, 571 F.3d at 782. The ICRP is a generous repayment plan that gives debtors with
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student loans a reasonable way to manage their debt. In re Chasser, 391 B.R. 482, 491 (Bankr.
M.D. Fla. 2008). Enrollment in an ICRP is dispositive not only to circuits that apply Brunner, but
to circuits that apply the totality of the circumstances test. See, e.g. Jesperson, 571 F.3d at 782
(applying the totality analysis). The availability of an ICRP is a rare opportunity for student
debtors to manage their overwhelming student debts into a reasonable repayment plan.
Enrollment in the ICRP is dispositive to the good faith inquiry because it illustrates that
the debtor takes his loan obligations seriously. See e.g., Frushour, 433 F.3d at 402; In re
Burkhead, 304 B.R. 560, 566 (Bankr. D. Mass. 2004); Rhodes v. Conn. Student Loan Fund (In re
Rhodes), 418 B.R. 27 (Bankr. D. Conn. 2009); In re Goodman, 449 B.R. 287 (Bankr. N.D. Ohio
2011). In Goodman, the debtors, husband and wife, argued that their showing of good faith was
through payments made some years ago towards the student loans. Goodman, 449 B.R. at 292.
The debtors however, were presented with an ICRP that required an initial monthly payment of
$0.00 with cancellation after twenty-five years. Id. at 296-97. The government presented the
husband and wife debtors with an agreed order providing that any balance due and owing on said
loan at the end of the twenty-five year program shall be considered an undue hardship and
discharged. Id. The court found that the husband and wife debtor’s refusal to enroll in the ICRP
demonstrates a lack of good faith to repay their student loans. Id. at 297. More so, the court held
that the debtor wife who made only a single payment towards her loan in fifteen years is
probative of bad faith. Id.
Ms. Estudiante does not show good faith because she did not enroll in the ICRP Bright
Futures offered to her. R. at 5. Like the ICRP in Goodman, Ms. Estudiante’s repayment plan
called for zero dollar monthly payments, and a discharge of student loans after twenty-five years.
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R. at 5. Like the debtors in Goodman, Ms. Estudiante did not present a reasonable explanation as
to why the ICRP would not have been an ideal situation for her to manage to student loans. R. at
5. In addition, unlike the debtor’s in Goodman, Ms. Estudiante failed to make even a single
payment towards her student loans, effectively ignoring them for approximately twenty years. R.
at 4, 5, 6. Ms. Estudiante’s refusal to take a simple step that to enroll in an ICRP that required
zero monthly payments with a discharge after twenty-five years does not show good faith, in fact
it is a showing of bad faith.
The ICRP manifests Congress’s aim to treat student loan debtors differently. Courts
acknowledge that “[a] debtor in bankruptcy cannot discharge government-guaranteed
educational loans through the normal channels.” Frushour, 433 F.3d at 396. Congress’s aim is to
prevent the discharge of federally guaranteed education loans except in cases where not granting
a discharge would impose an undue hardship. 11 U.S.C.S. § 523(a)(8). The 1992 amendments to
the Higher Education Act encourage those who are in unfortunate situations to pay what they can
by simply enrolling in one of the Department of Education’s ICRPs. 20 U.S.C.S. § 1087a (Lexis
2014).
The aim of Congress and Department of Education is demonstrated by the massive
number of repayment plans and flexible options made available to student debtors. See, e.g., 20
U.S.C.S. 1087e (Congress’s authorization of the federal loan program); 20 U.S.C.S. 1087a (“to
enable such students to pursue their courses of study at [higher education] institutions. . . .”); 34
C.F.R. § 685.208 (2010) (standard, contingent, graduate, income based,); 34 C.F.R. § 685.209
(pay as you earn, income contingent); 34 C.F.R. § 685.204 (2010) (interest free deferment of
loans); 34 C.F.R. § 685.212 (2010) (discharge of the loan obligation); 34 C.F.R. § 685.205
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(2010) (forbearance); 34 C.F.R. § 685.209 (choice of repayment); 34 C.F.R. § 685.219 (2010)
(public service loan forgiveness).
Bankruptcy Courts are overwhelmed by the number of individuals and businesses filing
for bankruptcy. The total number of bankruptcy filings in the twelve month period ending in
September of 2014 was 963,739. See Table F-2, Administrative Office of the U.S. Courts,
Bankruptcy Statistics, http://www.uscourts.gov/Statistics/BankruptcyStatistics/2014-bankruptcy-
filings.aspx. Of these filings, 642,366 of them were Chapter 7 filings. See Id. Although down
from the twelve month high of 1.6 million filings ending June of 2005, this number is three times
that of civil cases filed in the same period. See Table F, supra; Table C, Administrative Office of
the U.S. Courts, Federal Judicial Caseload Statistics, http://www.uscourts.gov/Statistics/
FederalJudicialCaseloadStatistics/caseload-statistics-2014.aspx. In fact, this is the one of the
many reasons that Congress passed the 2005 Bankruptcy Abuse Prevention and Consumer
Protection Act (“BAPCPA”). Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, Pub. L. No. 109-8, 119 Stat. 23. Although BAPCPA cut the number of bankruptcies filed
in the years following, the trend on bankruptcy filings has been growing again through 2013. See
Table F, supra.
With bankruptcy courts dealing with so many Chapter 7 cases every year, the need to find
efficiencies that do not compromise the pursuit of justice is important. The ICRP can provide this
kind of relief to an overwhelmed system. The analysis for good faith is a fact specific task that is
encapsulated in another fact specific task—the analysis of undue hardship. However, with the
ease of the ICRP and the relief it offers debtors with student loans, there is no substantive reason
why debtors would forgo enrolling in the plan before filing for bankruptcy. This offers a
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symbiosis that the bankruptcy courts can take advantage of without doing unnecessary harm to
debtors or creditors.
Furthermore, the bankruptcy system’s inflexibility leads to inefficiency for all parties
involved. Many student loan debtors file for Chapter 13, but after reevaluating, are forced to re-
file under Chapter 7. See, e.g. In re Ekensai, 325 F.3d 541 (4th Cir. 2003) (Debtor filed for
Chapter 13 but then re-filed for Chapter 7 two year prior to the completion of Chapter 13 plan).
Faced with the choice of bankruptcy or enrollment in a viable repayment plan, this Court should
encourage debtors with student loans to enroll in an available ICRP, rather than turning to
bankruptcy.
Because the ICRP requires no payments unless the debtor is solvent and above the
poverty level, courts should look to its enrollment as a dispositive factor of whether the debtor
has acted with good faith towards his student loans. There is no less the debtor can do except be
in default on his loans, which is certainly not acting in good faith. In addition, this protects
creditors from debtors attempting to abuse the bankruptcy system. The use of the ICRP as a good
faith standard offers this Court a rare situation that is a triumph for both adversarial parties and
the court system, and it should not pass it up.
B. Even if enrollment in an ICRP is not dispositive, where a debtor fails to take
any action towards repayment of his student loans, he cannot satisfy the good
faith requirement as a matter of law.
The number of matters in which good faith may be determined, elicits a “case-specific,
fact-dominated standard....” Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882, 884 (7th Cir.
2013). The good faith factor of the Brunner test recognizes that there are debtors that fail to
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make loan payments because of circumstances that are out of their control. Polleys, 356 F.3d at
1310. Courts do not wish to punish those who are not intentionally creating their hardship. Id.
Therefore, intrinsic within the good faith analysis is the notion that the debtor should not
willfully or negligently cause his own default. O’Hearn v. Educ. Credit Mgmt. Corp., 339 F.3d
559, 565 (7th Cir. 2003).
Where the debtor has not made any effort to repay their student loans, generally, the
debtor must make another showing of good faith to indicate their reason for not consolidating,
forbearing, or enrolling in an ICRP. See generally Polleys, 356 F.3d at 1302; Jesperson, 571
F.3d at 775; In re Frushour 433 F.3d at 393; In re Mosely 494 F.3d 1320 (10th Cir. B.A.P.
2009); Ekensai, 325 F.3d at 541; In re Tirch, 409 F.3d at 682; Roth, 490 B.R. at 908. The
showings must indicate a reasonable understanding of the circumstance the debtor is in, that
essentially the debtor tried to make payments on his student loans but could not, and did not
simply ignore the repayment option available to him. See In re Marcotte, 455 B.R. 460 (Bankr.
D.S.C. 2011) (following the onset of disability the debtor no longer could work and therefore
could no longer make payments on his student loans). Many courts have recognized that “with
the receipt of a government-guaranteed education, the student assumes an obligation to make a
good faith effort to repay those loans, as measured by his or her efforts to obtain employment,
maximize income, and minimize expenses.” Goulet v. Educ. Credit Mgmt. Corp., 284 F.3d 773,
787 (7th Cir. 2002) (citing Roberson, 999 2.d at 1135); see also Oyler, 397 F.3d at 382 (where
debtor failed to maximize income by working as a pastor for a small start-up church instead of
maximizing his earnings); In re Grant, 398 B.R. 205, 214 (Bankr. N.D. Ohio 2008) (debtor’s
claim of back pain did not suffice for not maximizing their income). In the instant case, Ms.
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Estudiante fails to satisfy the good faith prong of Brunner because her financial situation did not
manifest from outside circumstances. Rather, she caused her own default by not enrolling in a
generous ICRP, maximizing her income, or minimizing her expenses. Thus, Ms. Estudiante fails
the Brunner test.
1. Ms. Estudiante did not maximize her income.
A debtor does not show good faith without maximizing his income to repay his loans.
Polleys, 356 F.3d at 1312; see, e.g., Brightful v. Pennsylvania Higher Educ. Assistance Agency,
267 F.3d 324, 329 (3d Cir. 2001) (holding that a debtor has an obligation to pursue other
opportunities if unable to earn enough in his other current job); Rhodes v. Conn. Student Loan
Fund (In re Rhodes), 418 B.R. 27 418 B.R. 27 (Bankr. D. Conn. 2009). (the debtor showed a
striking indifference to maintaining steady employment and therefore does not show good faith).
Courts often consider the physical and mental ailments of the debtor in their good faith analyses.
Polleys, 356 F.3d at 1312. This is because the good faith analysis fundamentally attempts to
decipher between the good faith debtor and the debtor creating his own poor circumstances.
Mosley, 494 F.3d at 1327 (citing Polleys, 356 F.3d at 1311). In Mosely, although the debtor did
not make payments toward his loans or enroll in an ICRP, the court found that he made a good
faith effort to repay his loans because he had mental health conditions that prevented him from
maximizing his income. Id. Therefore, because it was not feasible for the debtor to maximize his
income, he could not repay his loans. Id.
Ms. Estudiante fails to show good faith because she did not maximize her income. Id.
Where a debtor fails to make a good faith effort to maximize his income to repay his student
loans, the debtor fails to satisfy the third prong of Brunner. See also Mosko, 515 F.3d at 322
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(Where debtor fails to make a good faith effort because she did not take up a “second part-time
jobs as many parents must” to maintain household expenses). The record notes that Ms.
Estudiante is in good health and has no medical conditions that would affect her ability to work.
R. at 5. Although Ms. Estudiante’s position is difficult, being the sole economic support for two
children for a period of years with a low set of skills, the record also indicates she is intelligent
and healthy. R. at 4, 5. A good faith analysis should consider all the circumstances in
determining whether a debtor can pay their loan. Unlike the debtor in Mosley, there are no
external circumstances preventing Ms. Estudiante from increasing her wages. For example not
taking on a second job when her current employer cut her hours and wages indicates that Ms.
Estudiante did not have good faith to repay her loan. R. at 4, 5. Ms. Estudiante did not put forth
an effort to maximize her income. Therefore, she does not show good faith to repay her student
loans.
2. Ms. Estudiante did not minimize her expenses.
A debtor does not show good faith when he does not make an attempt to minimize his
expenses. Mosko, 515 F.3d at 319; see also Educ. Credit Mgmt. Corp. v. Waterhouse, 333 B.R.
103 (W.D.N.C. 2005) (debtor’s ownership of two fairly new vehicles was not consistent with a
minimal standard of living, and that the debtor failed to show undue hardship); O’Hearn, 339
F.3d at 565 (Debtor may show good faith by minimizing their expenses by moving into a less
appealing home because of their financial obligations); Marcotte 455 B.R. at 460 (Debtor shows
good faith because he minimized living expenses by moving in with his parents). In Polleys the
court evaluated the efforts of the debtor to minimize her living expenses to compensate for other
hardships. Polleys, 356 F.3d at 1312. The debtor moved to a basement apartment and paid no
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rent or utilities other than her phone bill. Id. There were no other actions the court could
reasonable foresee the debtor could have taken to minimize her living expenses. Id.
Ms. Estudiante did not show good faith by minimizing her expenses when she did not
adjust her budget to compensate loan repayments. Id. The record indicates that Ms. Estudiante
faced hardship when her employer cut her wages and benefits while she still had to maintain the
same household budget. R. at 5. Courts often review a debtor’s budget to find if he took any
action to manage their student loan repayments. Frushour, 433 F.3d at 397 (where debtor
showed her good faith by indicating she only paid for the necessary expenses). The record does
not indicate that Ms. Estudiante took any measures to minimize her expenses. Unlike the debtor
in Polleys, Ms. Estudiante could have moved from her home to a less expensive apartment. Ms.
Estudiante lived in her hometown where she attended high school. R. at 4. She more than likely
had friends and family to call on for aid to minimize her living expenses. R. at 4, 5. Ms.
Estudiante did not minimize her expenses unlike the debtor in Polleys and therefore contributed
to her current financial situation.
3. Ms. Estudiante did not show good faith by contributing to her own
current financial situation.
Another relevant factor is whether the debtor made payments during times of budgetary
surplus. The court defines budgetary surplus as an excess of household income. Mosko, 515 F.3d
at 326. In Krieger, the debtor managed to make payments on her student loans despite being
unemployed and living with her mother, who was on social security. Krieger, 713 F.3d at 884.
The court pointed to the fact that “[s]he [was] essentially out of the money economy and living
in a rural, subsistence life.” Id. at 885. The court found good faith where the debtor faced
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challenging circumstances, but paid towards the loan when she was able. Id. Despite non-
enrollment in a payment program, the court also found the debtor demonstrated good faith
through this small effort. Id. at 884. Thus, good faith is shown when a debtor makes some
payment towards the student loan during a time of budgetary surplus. Id.
Ms. Estudiante failed to exhibit a good faith because even when she was capable of
making some payments towards her student loans, she failed to do so. Educ. Credit Mgmt. Corp.,
v. Mosko, 322 F.3d 549 (8th Cir. 2003). During the time Ms. Estudiante’s finances improved, she
was capable of making some payments towards her loan. R. at 4, 5. Like the debtor in Krieger,
Ms. Estudiante would have shown good faith effort to repay her loans despite her typically low
household income. Krieger, 713 F.3d at 885. To not make some payments towards a student loan
while not enrolling in an income contingent repayment plan is probative toward the good faith
intention of Ms. Estudiante. Id.
Ms. Estudiante did not meet any standard of the good faith prong because, not only did
she fail to make payments towards her student debt, she did not maximize her income, minimize
her expenses, or take advantage of her budgetary surpluses.
C. ICRP and similar programs provide more tailored relief to student loan
debtors than bankruptcy.
Filing for bankruptcy should not be the only viable option for debtors with student loans.
Because the ICRP is tied to every debtor’s respective financial situation, it is more capable of
adapting to changing circumstances. 34 C.F.R. § 685.209. In contrast, a bankruptcy court must
gaze into its crystal ball to determine a debtor’s future financial circumstances. Commission
Report, at 4-711. This is heightened by the fact that bankruptcy courts have very few available
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tools, and therefore do not succeed in predicting a debtor’s future often. This is demonstrated by
these courts poor performance in ratifying Chapter 13 plans. Historically, Chapter 13 plans have
a 31% chance of success without modification or resulting in Chapter 7 liquidation. William C.
Whitford, The Ideal of Individualized Justice: Consumer Bankruptcy as Consumer Protection,
and Consumer Protection in Consumer Bankruptcy, 68 Am. Bankr. L.J. 397, 411 (1994).
Courts have also struggled with this when dealing student loan discharges as well. The
court in In re Miller, found the financial circumstances too uncertain to definitively say what the
potential income for the debtor will be. In re Miller, No. 3:05-CV, 2005 WL 2127931, at *3
(E.D. Tenn. Aug. 31, 2005). The court considered the debtor did not have any illness or
disability, and she has no dependents. Id. However, her current financial situation was poor and
could not currently make payments on her student loans. Id. The court found the predictability of
the debtor’s finances were too speculative, and ultimately found the debtor did not demonstrate
good faith. Id. This issue is found again in the Ninth Circuit, where the debtor had jobs in the
past, but had lost her current employment. Roth, 490 B.R. at 912. The debtor also presented as
evidence her extensive job search. Id. The court struggled with the prospect that first, the income
of the debtor was never significantly above necessary expenses, and second the debtor’s inability
to currently make payments on her loans. Id. The court concluded that the fact the debtor did not
negotiate her loans, or obtain forbearances, the debtor did not demonstrate good faith. Id. at 919.
There are number of court opinions that note the difficulty of dealing with the
adjudication of the good faith requirement. See, e.g., In re Craig, 579 F.3d 1040 (9th Cir. 2009)
(the court remanded because the necessary fact-intensive clarification of the debtor’s sources of
income); Mosko, 515 F.3d at 319 (debtor failed to find supplemental income during her summer
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months off from her teaching job); In re Hornsby, 144 F.3d 433 (6th Cir. 1998) (family living
comfortably on current income, but making payments would put them close to the poverty line).
If all other factors fail to provide courts with a reasonable answer, many courts look to actual
payment of student debt as good faith. For instance, the Fourth Circuit did not grant discharge
despite the debtor having made some payments to his student loan. Frushour, 433 F.3d at 393.
The court found the debtor’s reasoning for not enrolling in an ICRP to be the dispositive issue.
Id. at 402. The court noted, “to be sure, she should be commended for making several payments
in the past. But she did not seriously consider the income contingent plan under the William D.
Ford Direct Loan Program.” Id. The court used this issue of enrollment in ICRP as a defined
way to resolve the fact heavy question.
An ICRP that cancels student loans after twenty-five years for an insolvent debtor will
not result in the tax penalty that comes with cancellation of indebtedness income. Many courts
mistakenly assume that the enrollment in an ICRP would require the debtor to “effectively trade
one nondischargeable debt for another.” Mosley, 494 F.3d at 1327. However, the Tax Code states
gross income does not include discharge of indebtedness income when the taxpayer is insolvent.2
26 U.S.C.S. § 108(a)(1)(B) (Lexis 2014). The concern for a discharge of indebtedness being
included in one’s taxable income only falls within the context of a solvent debtor. The solvent
debtor is not the individual that the ICRP is concerned about because the solvent debtor should
be making payments on his debts. Under the ICRP, the payments are limited to twenty percent of
the difference between the debtor’s annual income and the poverty level as defined by the IRS.
2 Insolvency means, “with reference to an entity other than a partnership and a municipality, financial condition
such that the sum of such entity's debts is greater than all of such entity's property.” 11 U.S.C.S. § 101.
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34 C.F.R. § 685.209. Therefore, when a debtor is insolvent, his required monthly payments
under the ICRP are zero. If a debtor still cannot pay his debt at the end of the twenty-five year
plan because he is still insolvent, the discharge will not be included in his gross income for
income tax purposes. This creates a “win-win” situation for the insolvent debtor.
Ms. Estudiante would not be burdened with a debt to the IRS if she had enrolled in the
ICRP and her student loan debt was cancelled at the end of the twenty-five year repayment plan.
Ms. Estudiante owes $48,000 on her student loans. R. at 6. Based on her household income and
her current expenses, Ms. Estudiante is insolvent under the Tax Code. Enrollment in the ICRP is
a viable option for Ms. Estudiante because under the ICRP that Bright Futures offered, Ms.
Estudiante would be required to make monthly payments of zero. R. at 5. Furthermore, if Ms.
Estudiante is still insolvent at the end of the twenty-five year repayment period, her debt will be
canceled and she will have no discharge of indebtedness income. If Ms. Estudiante enrolled in
the ICRP offered by Bright Futures, it would be a win-win situation. Using enrollment in the
ICRP as a dispositive test of good faith on the part of the debtor provides predictability,
reliability, and efficiency.
________
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CONCLUSION
Due to the reasons stated above, petitioner respectfully requests that this Court reverse
the ruling of the Court of Appeals for the Thirteenth Circuit.
Respectfully submitted,
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Counsel of Record January 26, 2015
APPENDIX
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APPENDIX A – OPINION BELOW
Decided: October 13, 2014
Before Judges NICOTERA, KRUPNICK and ROE, Circuit Judges
ROE, Circuit Judge:
I. Factual Background and Procedural History
The one trillion dollar question is how to deal with our nation’s overwhelming student loan debt.
While our decision today focuses on a single provision of the Bankruptcy Code that addresses
the dischargeability of educational loan debt and that only affects those borrowers who are in
bankruptcy, it cannot be divorced from the broader context of the student loan debt crisis. The
educational debt load at both the individual and national levels is simply overwhelming.
Whereas in the past a student loan paved the path to economic betterment and fostered the
opportunity and upward mobility that is the hallmark of the American dream, the opposite is now
often the case. Fueled by a government-supported policy that ignores credit worthiness, the cost
of both public and private education has skyrocketed. Tuition alone at quality private educational
institutions often exceeds $50,000 per year, and even state-supported schools often charge more
than $25,000 per year (with tuition exceeding $40,000 per year in some states and some pro-
grams). When room and board and other incidental costs are included, many students graduate
with debt that greatly exceeds their realistic ability to repay, even if their education allows them
to obtain well-paying jobs.
The problem is exacerbated by the growth of for-profit educational institutions, some of which
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provide little value and build their profit models to exploit both their students and the student
loan programs. Abuses in this lightly policed sector are well-documented. In addition, the types
of training that are supported by student borrowing have expanded exponentially. Many of these
institutions do not provide a traditional college education, but rather offer other types of voca-
tional training that may not significantly improve the student’s chances for employment or
substantial earnings. Further, for a variety of reasons, many students do not complete their
educational programs and thus fail to receive even the modest benefits that such a vocational
certificate might have provided. The debt, however, remains.
Students graduate saddled with barely manageable debt even if they obtain appropriate employ-
ment immediately. The burdensome debt load prevents these graduates from starting their lives.
They may have to postpone marriage and children indefinitely and have no realistic hope of
owning a home since the sheer amount of student loan debt will render them ineligible for
mortgage financing. Saddling our most ambitious citizens with unmanageable student loan debt
is not only bad for the graduates, but it also damages our nation by inhibiting their participation
in the economy. The situation for those whose education did not provide a significant economic
advantage is even worse. The default rate on student loans is exceedingly high, with millions of
borrowers in default and millions more in forbearance or deferment programs. And the effects of
student loan debt are not short-lived. As in this case, student loan debt can linger for decades.
The Federal Reserve Bank of New York estimates that more than a third of all student loan debt
is owed by individuals who are 40 years old or older. See Donghoon Lee, Household Debt and
Credit: Student Debt at 4 (Federal Reserve Bank of New York, Feb. 28, 2013),
http://newyorkfed.org/newsevents/mediaadvisory/2013/Lee022813.pdf. Estudiante is one of
those individuals.
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Twenty years ago, at the age of 26, Sara Estudiante entered the Moot State College seeking to
obtain a bachelors degree in business administration. Estudiante was a high school honors
graduate and her future looked promising. She was married to her high school sweetheart, Ron
Estudiante, and they had a three-month-old child. Estudiante did well at Moot State and in her
sophomore year had a second child. During the second semester of Estudiante’s junior year, Ron
became ill and was unable to continue working at his job. As a result, Estudiante had to drop out
of college and return to her former full-time job as a sales clerk at Mallmart in order to support
the family. At the time she dropped out of college, Estudiante owed $24,000 in student loans
under the federal William D. Ford Direct Loan Program.
Ron’s condition deteriorated and he passed away a year later. Faced with unpaid medical bills
and the expenses of raising two children alone, Estudiante barely made ends meet during the first
few years after Ron’s death. She made no payments on her student loans during that time. While
her finances improved after she had repaid the medical bills and she could have made some
payments on her loans for a period of several years, she made no attempt to do so. In recent
years, the local economy has been depressed and the increased competition from on-line mer-
chants has caused Mallmart to cut expenses. While Estudiante is at no risk of losing her job, her
work hours, salary and benefits were reduced several years ago and there is no expectation that
the situation will improve. She has not made any payments on her student loans and, even though
the kids are grown and no longer require Estudiante’s support, she cannot afford to make any
payments on her student loans. While Estudiante is in good health and has no medical or other
conditions that would affect her ability to work, she has few skills and at age 46, with her only
work experience being her sales clerk job, she is not likely to find better employment in the
future. Her student loans have continued to accrue interest, and she currently owes more than
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$48,000, with interest accruing at a rate of about $1,700 per year. The debt amount is more than
twice her annual income. Her adjusted gross income for tax purposes has been below the federal
poverty level for several years, and there is no reason to believe that will change in the future.
Estudiante never requested a deferment, modification or renegotiation of her student loans, and
she did not apply for the Department of Education’s Income-Contingent Repayment Plan ICRP
(see 34 C.F.R. § 685.209(b)) even though she was eligible for the program and Bright Futures
had provided her information showing that her monthly payment amount would be zero if she
enrolled.
The student loan was not Estudiante’s only problem. Estudiante was still supporting her children
when Mallmart cut her wages and benefits. Since her expenses did not decrease, she went deeper
into debt to cover family expenses. She also missed several mortgage payments and the bank
foreclosed on her home. Unfortunately, because of the recession, the home sold for far less than
the amount of the mortgage debt. Under the law of the State of Moot, Estudiante is liable for the
shortfall and the bank obtained a deficiency judgment against her. While the bank has made no
effort to collect its deficiency judgment, the same cannot be said for her other creditors. Several
of her past-due charge card debts were sold to collection agencies, and they have aggressively
pursued collection. Those actions caused Estudiante to file a petition in bankruptcy under chapter
7 of the Bankruptcy Code. Estudiante instituted an adversary proceeding in her bankruptcy case
against the servicer of her educational loans, Bright Futures Educational Credit Corp., seeking a
determination that her loans were dischargeable under 11 U.S.C. § 523(a)(8).
The Hon. Kelly E. Porcelli, United States Bankruptcy Judge for the District of Moot, held a
bench trial at which Estudiante and Bright Futures presented evidence. Bright Futures argued
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that the widely-adopted three-prong Brunner test should be used to determine whether undue
hardship exists. See Brunner v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir.
1987). Bright Futures further argued that Estudiante’s failure to enroll in an ICRP operates per se
to render her educational loans non-dischargeable. Judge Porcelli rejected Bright Future’s legal
arguments and instead applied a totality of the circumstances test to hold that the student loans
did impose an undue hardship on Estudiante and were discharged.
Bright Futures appealed to the District Court. It did not challenge any of the Bankruptcy Court’s
factual findings and limited its appeal to the legal issues it had raised below. The Hon. Arianna
Efstathiou, United States District Judge for the District of Moot, reversed the Bankruptcy Court.
The District Judge held that undue hardship must be determined using the Brunner test. Under
that test, Estudiante failed to qualify for a discharge of her educational loans for several reasons.
The District Court held that Brunner requires the debtor prove good faith and that a debtor’s
failure to apply for an available payment reduction program was proof of the debtor’s lack of
good faith. In the alternative, the District Court held that the availability of the ICRP program
meant that Estudiante’s loan payments would never interfere with her ability to maintain the
“minimal standard” of living that Brunner mandates. Under the ICRP formula applicable to
Estudiante, her annual payments would never exceed 20 percent of her “discretionary income,”
with that term defined as the amount by which her adjusted gross income exceeded the federal
poverty level. Payments would be adjusted annually to reflect changes in her income and the
federal poverty level, with any amounts remaining due after 25 years being “cancelled.” 34
C.F.R. § 685.209(b)(3)(iii)(D). Thus, the District Court held that payments made under an ICRP
cannot as a matter of law impose an undue hardship because the 20 percent of discretionary
income payment formula ensures that payments do not prevent the debtor from maintaining a
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minimal standard of living. The District Court also focused on the application of the ICRP test to
Estudiante. Under the ICRP, Estudiante would be required to pay nothing each month for 25
years followed by cancellation of the debt. The District Court held that payments of nothing
could not, as a matter of law, impose an undue hardship.
This appeal followed.
II. Discussion
There is some disagreement among our sister circuits whether an undue hardship determination
under section 523(a)(8) should be reviewed de novo or under a more deferential standard of
appellate review. See, e.g., In re Roth, 490 B.R. 908, 914-16 (9th Cir. B.A.P. 2013). We need not
decide that issue in the instant case because we have before us only the questions of the proper
legal standard for undue hardship and the impact of the ICRP based on factual findings that
neither party challenges. We review a lower court’s legal conclusions de novo, and need not give
any deference to its conclusions of law. ASM Capital, LP v. Ames Dep’t Stores, Inc. (In re Ames
Dep’t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009).
A. Undue Hardship Requires a Reasonableness Determination
Changes in the nature of student loans require that we look at the question of loan dischargeabil-
ity with fresh eyes. The unreasonably harsh gloss that courts have placed on the term “undue
hardship” originated in an era when loan amounts were modest and the focus was on recent
graduates attempting to abuse the discharge rules to avoid paying for a valuable degree. That is
no longer the case and the test developed for a prior era should be recognized as the relic that it is
and discarded. To do so requires us to take no exceptional steps. Instead, we return to the lan-
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guage of the statute and simply apply its plain meaning.
Brunner was wrong when it was decided and it is even more clearly wrong today. Unfortunately,
it has become the predominant test for measuring undue hardship under section 523(a)(8).
Although at least nine circuits have adopted the Brunner test, we join the Eighth Circuit in
adopting a totality of the circumstances approach. Compare Long v. Educ. Credit Mgmt. Corp.
(In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003) with Pennsylvania Higher Educ. Assistance
Agency v. Faish (In re Faish), 72 F.3d 298, 300 (3d Cir. 1995); Educational Credit Mgmt. Corp.
v. Frushour (In re Frushour), 433 F.3d 393, 400 (4th Cir. 2005); United States Dep’t of Educ. v.
Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003); Oyler v. Educ. Credit Mgm’t Corp.
(In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); In re Roberson, 999 F.2d 1132, 1135 (7th Cir.
1993); United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1114 (9th Cir. 1998);
Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004); Hemar Ins.
Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003).
Motivated by a concern that recent graduates might abuse bankruptcy by discharging their
student loans shortly after graduation,3 Congress limited the dischargeability of student loans in
section 523(a)(8) of the Bankruptcy Reform Act of 1978. That exception was very narrow. Only
3 The education loan discharge provision first appeared in 1977 and applied under the former Bankruptcy Act. See
Education Amendments of 1976, Pub. L. No. 94-482, § 127(a), 90 Stat. 2081, 2141. The amendment was driven by
concerns that students might file bankruptcy shortly after graduation to avoid paying for their educations. See S.
Rep. No. 94-482 at 32 (1976), reprinted in 1976 U.S.C.C.A.N. 4713, 4744. The Bankruptcy Act was repealed and
replaced by the current Bankruptcy Code and its almost identical discharge exception the following year.
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student loans that had first become due within five years before bankruptcy were excepted from
discharge. Older loans were freely dischargeable. Further, Congress provided that even recent
loans could be discharged if “excepting such debt from discharge will impose an undue hardship
on the debtor or the debtor’s dependents.” Pub. L. No. 95-598, § 523 (a)(8), 92 Stat. 2549, 2591
(1978). But for a few minor changes, the undue hardship exception remains unchanged in the
current law. See 11 U.S.C. § 523(a)(8).
It was against this backdrop that the Brunner test was created. Rather than focus on the text of
the statute, the Brunner analysis is based on the 1973 report of the Commission on the Bankrupt-
cy Laws of the United States, which suggested a number of factors for consideration in determin-
ing undue hardship. Neil Phillips, How Poor is Poor Enough? Tracking the Evolution of Student
Loan Dischargeability from Judge Haight to Judge Easterbrook, 12 Geo. J.L. & Pub. Pol’y 329,
337 (2014). Brunner did not treat those factors as mere considerations, but devised a difficult to
satisfy three-pronged test that elevated them to statutory requirements. Under Brunner, undue
hardship required a three-part showing: “(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, 831 F.2d at 396. Each of the
prongs must be established; the failure to establish any of the three prongs results in the loan
being excepted from the discharge. The net effect is that Brunner requires the debtor to prove a
“certainty of hopelessness.” In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993).
The statutory language – “undue hardship” – provides no support for such a draconian and
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mechanical three-part test. However, in the context of the original discharge exception the test
did little harm since it focused on only the first five years of repayment. Congress later extended
the non-dischargeabilty period to seven years, and in 1998 eliminated the time limitation leaving
“undue hardship” as the only ground for discharging student loans. With decades-old student
loans coming within the discharge exception, the flaws in the Brunner test have become appar-
ent. As Bankruptcy Judge Pappas pointed out, Brunner sets an unrealistic standard requiring the
debtor to prove that her prospects are forever hopeless. Roth, 490 B.R. at 923.
Judge Easterbrook also recently questioned the Brunner analysis. Although bound by prior
circuit authority adopting the Brunner test, he refocused the analysis on the language of the
statute, stating, “The statutory language is that a discharge is possible when payment would
cause an ‘undue hardship’. It is important not to allow judicial glosses, such as the language in
Roberson and Brunner, to supersede the statute itself.” Krieger v. Educ. Credit Mgm’t Corp., 713
F.3d 882, 884 (7th Cir. 2013).
Turning to the statutory language, we find no support for Brunner’s three prong test. Congress
used the term “undue hardship” and that has a meaning very different from a life-long certainty
of hopelessness. See Krieger, 713 F.3d at 885. The dictionary defines “due” as “reasonable” and
“undue” as “excessive” or “unwarranted.” Black’s Law Dictionary 609 and 1759 (10th ed.
2014). The term undue hardship cries out for a determination of what is reasonable to expect of a
debtor after considering all relevant circumstances, an inherently discretionary exercise. Con-
gress could have chosen a different term like extreme hardship had it intended the Brunner
result. Indeed, Congress did choose an even higher dischargeability standard for Health Educa-
tion Assistance Loans. Those loans can be discharged only if "nondischarge of such debt would
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be unconscionable." See 42 U.S.C. § 292f(g).
What has been missing from the educational loan discharge analysis is any serious discussion of
the bedrock principle of bankruptcy jurisprudence that exceptions to discharge should be narrow-
ly construed. Our bankruptcy laws embody the very American ideal that the honest but unfortu-
nate debtor deserves a fresh start free from the burden of indebtedness. Grogan v. Garner, 498
U. S. 279, 286, 287 (1991). That purpose requires that “exceptions to discharge ‘should be
confined to those plainly expressed.’” Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998). Thus the
term undue must be read to impose only a threshold of mere unreasonableness, not one of
extreme hardship. While we adopt the totality of the circumstances approach, we note that some
courts utilizing that approach have imposed a discharge standard almost as harsh as the Brunner
test. Under our approach, courts should consider all relevant factors to determine whether the
burden imposed on the debtor by excepting a student loan from discharge is an unreasonable
one; not an extreme burden or unconscionable result.
B. The Availability of an Income-Contingent Repayment Plan is Not Relevant to the Undue
Hardship Inquiry
While most courts that have considered the issue have held that the availability of an ICRP is an
important, and possibly decisive, factor in the undue hardship analysis, we believe that it should
not be a factor unless the debtor has enrolled in such a plan so that her debt obligation is deter-
mined by the repayment plan. We reach this conclusion both by applying a narrow construction
to the language of the section 523(a)(8) exception to discharge and by considering the im-
portance of the fresh start policy.
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The question is simply whether we must analyze the hardship imposed by the debtor’s current
debt obligation or whether it should be measured by other possible debt obligations that might
replace the current one based on hypothetical future administrative determinations made by the
Secretary of the Department of Education. The answer provided by the plain language of the
statute is that we must focus our hardship analysis on the existing debt. That is why the debt
must be treated differently in the totality of the circumstances analysis from factors such as the
debtor’s expenses and income, where the possibility of future or alternative changes is highly
relevant.
When Estudiante filed bankruptcy she owed more than twice her annual income in student loan
debts and had no ability to make any loan payments then or in the foreseeable future. Section
523(a)(8) requires us to determine whether “excepting such debt” from discharge would impose
undue hardship. Debt is a term of art that means “liability on a claim,” with claim meaning a
“right to payment.” See 11 U.S.C. §§ 101(5)(A) & 101(12). The relevant “debt” is $48,000 plus
accruing interest and, in Estudiante’s circumstances excepting that debt from discharge would
impose an undue hardship.
Even if we focused on the ICRP, Estudiante will still owe $48,000 and interest will still accrue
during the 25 year repayment period. While Estudiante will not need to make any payments
during that time unless her situation improves, the debt will not be cancelled unless and until she
completes the ICRP at age 71. The focus of section 523(a)(8) is whether repayment of the debt
imposes an undue hardship. An ICRP does not repay the debt, but rather defers and then may
cancel it. Consideration of the availability of an ICRP improperly converts the section 523(a)(8)
question from “would it impose undue hardship to require the debtor to repay the loan” into
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“would it impose undue hardship to require the debtor to participate in an ICRP.” See In re
Grove, 323 B.R. 216, 229 (Bankr. N.D. Ohio 2005); see also In re Bronsdon, 435 B.R. 791, 806
(1st Cir. B.A.P. 2010) (Haines, J., concurring).
Some courts have held that the fact that the ICRP requires no payment is grounds for discharge,
see Bronsdon, 435 B.R. at 803, or that discharge can be based on the possible income tax liabil-
ity that the debtor will face in 25 years when the loan cancellation results in discharge of indebt-
edness income. Id. at 802. Our objection is more fundamental.
The bankruptcy discharge is designed to give the debtor a fresh start. Reliance on the availability
of an ICRP to except a student loan debt from discharge is contrary to the fresh start principle.
Congress easily could have excepted all ICRP loans from the undue hardship provision and
substituted the relief available under that administrative program for the relief available in
bankruptcy. It has not done so. Yet, while denying they are applying a per se rule, the courts that
treat an ICRP as an important undue hardship factor are effectively repealing section 523(a)(8)
for ICRP loans. See In re Johnson, 299 B.R. 676, 683 (Bankr. M.D. Ga. 2003).
Congress has created a system with two alternative paths for student loan relief. A borrower can
enroll in an ICRP (or another program like Pay As You Earn or an Income-Based Repayment
Plan) and rewrite the loan payments down to an amount she can afford, with the potential for a
discharge 25 years in the future. Or, the borrower can file bankruptcy and seek to discharge the
debt immediately, subject to the undue hardship test.
The bankruptcy fresh start is designed to be a fresh start now, not a fresh start delayed by a
quarter century spent in a debtors’ prison without walls. Even if her monthly payments under an
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ICRP are zero, Estudiante still owes an enormous debt. The existence of the debt alone will
impair her fresh start by rendering her ineligible for credit. If her fortunes do improve, the debt is
waiting there to capture the fruits of her future efforts. And under the ICRP program, the adjust-
ed future monthly payments on the revived debt could exceed the originally scheduled payments
if the borrower’s income increases sufficiently. That is the antithesis of a fresh start.
The ICRP is a laudable government program, but incorporating it into section 523(a)(8) puts us
on a slippery slope indeed. With private student loans now also protected by section 523(a)(8),
logically an alternative repayment plan offered by a private lender would also negate a finding of
undue hardship. It is the court’s duty to determine dischargeabilty and that duty cannot be
delegated, directly or indirectly, to an administrative agency or a private lender. See Bronsdon,
435 B.R. at 803.
III. Conclusion
For the foregoing reasons, we reverse.
NICOTERA, Circuit Judge, dissenting:
I respectfully dissent from both of the conclusions reached by the majority.
I agree that we face a student loan crisis, but it results from too few students taking their loan
obligations seriously and not from too strict a discharge standard. One trillion dollars is an
enormous sum, and if the students who benefitted from an education bought with borrower funds
do not repay their loans, that burden will fall to the taxpayers. The double digit default rates on
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student loans is a disgrace,4 especially since the government has responded reasonably and
generously to those who want to honor their obligations, but make too little income to do so in
full. There are now several different programs offered by the Department of Education that are
available generally to borrowers under federal loan programs who face financial hardship. And,
the terms of these programs are quite liberal. Both the Pay As You Earn and the Income-Based
Repayment Plan (IBRP) require no payments at all unless the borrower’s adjusted gross income
for tax purposes is one and a half times the federal poverty level. See 34 C.F.R. §§ 685.209(a) &
685.221. If the borrower’s income exceeds that level, then the annual payments are capped at 15
percent of the excess and only 10 percent for some borrowers. After 20 years in a Pay As You
Earn plan, or 25 years in an IBRP, any unpaid loan debt is cancelled. Since Estudiante made no
effort to repay her loans and is in default, she is not eligible for the more liberal IBRP and must
use the ICRP, which captures 20 percent of the excess of her adjusted gross income over the
federal poverty level. But even that is still a generous program and in Estudiante’s case will cost
her nothing unless her fortunes improve. However, instead of making a good faith effort to pay
something if she ever becomes able, Estudiante wishes to simply walk away from her loan
obligations. That is an abuse that should not be tolerated.
A. The Brunner Test Establishes the Appropriate Measure for Undue Hardship The majori-
ty argues that changes since 1978 have turned the Brunner test into a relic that should be dis-
carded. See Brunner v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987). I
4 While about 17% of all borrowers were delinquent in 2013, that figure includes borrowers who were not yet in repayment because of deferments. If only those borrowers in repayment are considered, the delinquency rate exceeds 30%. Donghoon Lee, Household Debt and Credit: Student Debt at 15. (Federal Reserve Bank of New York, Feb. 28, 2013), http://newyorkfed.org/newsevents/mediaadvisory/2013/Lee022813.pdf.
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reach the opposite conclusion. Changes in the nature of educational loan debt and amendments to
11 U.S.C. § 523(a)(8) make the strict, multifaceted approach of Brunner a better test for dis-
charge than when initially conceived. The great majority of our sister circuits seem to agree. See
Pennsylvania Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 300 (3d Cir.
1995); Educational Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 400 (4th
Cir. 2005); United States Dep’t of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir.
2003); Oyler v. Educ. Credit Mgm’t Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); In re
Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993); United Student Aid Funds, Inc. v. Pena (In re
Pena), 155 F.3d 1108, 1114 (9th Cir. 1998); Educational Credit Mgmt. Corp. v. Polleys, 356
F.3d 1302, 1309 (10th Cir. 2004); Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238,
1241 (11th Cir. 2003).
Unlike the amorphous totality of the circumstances approach that does little to limit discretion or
treat similar debtors similarly, the Brunner test focuses the undue hardship inquiry on three
factors. See Educ. Credit Mgm’t Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004). The
majority views the articulation of those factors as improper judicial legislation, but that is not the
case. Congress did not define undue hardship. But the Bankruptcy Commission report from
which Congress adopted the concept addressed its meaning in some detail. See Report of the
Comm. on the Bankr. Laws of the U.S., H.R. Doc. No. 93-137, 93d Cong., 1st Sess. 1973.
Legislative history materials, especially the carefully considered Bankruptcy Commission report,
are far better sources for determining the meaning of undefined statutory terms than a dictionary.
Further, the Brunner prongs make sense, and they honor the policy behind the student loan
exception to discharge. Even the majority recognizes that some hardship should be imposed on
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educational loan borrowers. The first prong of the Brunner test simply requires that the debtor
make some sacrifice to repay the loans. However, if repayment would drive the debtor below a
minimal standard of living, then the first prong of the undue hardship test is met. The second
prong simply requires a showing that the debtor’s inability to pay is not of short duration. Rather
the debtor must show that the condition will persist for a significant portion of the repayment
period. Those prongs focus on the economic aspects of hardship.
The final prong focuses on whether it is appropriate to impose further economic hardship on the
debtor. The debtor must show that she has made a good faith effort to repay the loans. The good
faith requirement does not come out of thin air. It is grounded in the “undue” part of the undue
hardship test. An educational borrower who shirks her responsibility to pay what she can when
she can is not deserving of relief from her loan debt, and thus the hardship she suffers is deserved
and not undue. Where I differ from the majority is that it views the term undue as simply meas-
uring the quantum or degree of hardship the loan imposes on the borrower, while I view it as also
including a fairness element. Without the good faith prong, Brunner could not have effectively
filtered out the very debtors the exception was created to address – those who were attempting to
abuse the bankruptcy discharge to retain the benefits of a valuable degree without repaying the
loaned funds they used to acquire the degree.
As section 523(a)(8) was amended over the years, Brunner became an even more appropriate
test. As loan repayment periods and debt amounts increased and as the exception period was
lengthened from five to seven years, and then to an unlimited time, it became clear that Con-
gress’ purpose had shifted from avoiding opportunistic behavior by recent graduates to protect-
ing the economic foundations of the student loan program and to insuring that borrowers could
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not obtain a valuable degree asset without paying for it. Cf., H.R. Rep. No. 105-750 at 408
(1998), reprinted in 1978 U.S.C.C.A.N. 404, 812 (noting that the time limitation was removed
for budgetary reasons). Those goals are furthered both by the second prong’s requirement of
additional circumstances and its focus on the repayment period and the third prong’s good faith
requirement.
The legislative trend supports the Brunner test in two other ways. First, Brunner has been widely
adopted by most of the circuits and is the almost universally applied standard for undue hardship.
Had Congress intended a different or lesser standard, it easily could have amended the undue
hardship requirement, yet it never altered that provision. More importantly, each amendment to
section 523(a)(8) has expanded the exception to discharge for student loans. Viewed against this
consistent anti-discharge trend, it is inconceivable that Congress intended to relax the interpreta-
tion of undue hardship when it expanded that concept’s application to older loans or to private
loans.
B. The Availability of an Income-Contingent Repayment Plan Precludes a Finding of
Undue Hardship
Contrary to the majority’s view, the overwhelming position of the reported decisions on point is
that the availability of an ICRP is a relevant factor in the undue hardship analysis under section
523(a)(8). Most opinions hold that it is a very important factor, and this is true both of cases
decided under the Brunner test and those that apply a totality of the circumstances analysis. See,
e.g., Educ. Credit Mgm’t Corp v. Jesperson, 571 F.3d 775, 782 (8th Cir. 2009) (applying a
totality analysis).
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Several judges come very close to adopting, and as a practical matter do adopt, a per se approach
that requires enrollment in an income adjusted repayment plan if eligible. Terrence Michael &
Janie Phelps, “Judges?! - We Don’t Need No Stinking Judges!!!”: The Discharge of Student
Loans in Bankruptcy Cases and the Income Contingent Repayment Plan, 30 Tex. Tech. L. Rev.
73, 89 (2005). In this regard, I would adopt Judge Manion’s view, as expressed in his concurring
opinion in Krieger v. Educ. Credit Mgm’t Corp., 713 F.3d 882 (7th Cir. 2013). There he stated,
“[F]or those who perceive that their employment-seeking efforts are at a dead end, bankruptcy
should not be the answer. Rather than challenging the non-dischargeability barrier in bankruptcy,
those who have concluded that there is no way they can pay off the debt should be required to
enroll in the William D. Ford Income-Based Repayment Plan.” Krieger, 713 F.3d at 886 (em-
phasis added).
I believe that proper application of Brunner requires a finding of non-dischargeability when the
debtor is eligible for an ICRP and fails to enroll. The existence of an ICRP negates a finding in
the debtor’s favor under both prongs one and two of Brunner. See Michael & Phelps, supra at
88-90. The ICRP sets a payment threshold that captures only 20 percent of the debtor’s above
poverty level income (in fact it is more liberal since it compares adjusted gross income to the
poverty level and thus does not consider income and government benefits that are excluded from
the adjusted gross income figure, but that do improve the debtor’s standard of living). While the
federal poverty level is not generous, a student loan debt that captures only 20 percent of the
excess does not impose an undue hardship and does not prevent a debtor from maintaining a
“minimal” standard of living as required by the first prong. Further, since the payments are
adjusted annually, the debtor cannot make the showing required under the second prong that
repayment will force the debtor below a minimal standard of living for a substantial part of the
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repayment term. Most importantly, Estudiante’s failure to apply for an ICRP negates the third
prong’s required showing that she made a good faith effort to repay her loan. Accord Krieger,
713 F.2d at 886 n.4 (Manion, J., concurring). The good faith inquiry extends to the debtor’s
conduct before bankruptcy and her failure to enroll in the program demonstrates a lack of a good
faith effort to repay what she could afford. The policy behind section 523(a)(8) requires no less.
My view does not render section 523(a)(8) surplusage, nor does it delegate to the Secretary of
the Department of Education the dischargeability determination. Section 523(a)(8) applies with
full force to private student loans and any other loans for which an income adjusted repayment
plan is not available. Further, the Secretary is not making the section 523(a)(8) determination.
The existing legal standard for undue hardship is simply being applied to the new factual context
created by the ICRP. By reducing the actual hardship that repayment of the loan entails, the
ICRP has changed an important factor that courts must consider in the undue hardship analysis.
Even if Estudiante’s failure to enroll in an ICRP does not raise a per se barrier to discharge, she
should be denied discharge of her loan in this case. It is uncontested that Estudiante will not be
required to make any payments on her student loans under an ICRP because her income is too
low. Further, as part of the evidence she presented to satisfy the second Brunner prong, Estu-
diante has established that her situation is unlikely to change. At the end of 25 years of paying
nothing, Estudiante’s loan will be forgiven. Thus, we are presented with a case where the evi-
dence establishes that Estudiante will never have to pay anything on her student loan. Under
Brunner this means that her repayment will not have any impact on her standard of living, and
that the debt cannot be discharged as a matter of law. Even under a totality of the circumstances
approach, being required to pay nothing is not undue hardship. In re Nielsen, 518 B.R. 529, 535
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(8th Cir. B.A.P. 2014).
For the aforementioned reasons, I cannot join the majority’s opinion and must respectfully
dissent.
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APPENDIX B
RELEVANT CONSTITUTIONAL PROVISIONS
USCS Const. Art. I, § 8, Cl. 4
“The Congress shall have Power . . . To establish an uniform Rule of Naturalization, and uniform
Laws on the subject of Bankruptcies throughout the United States . . . .”
RELEVANT LEGISLATIVE STATUTES
11 U.S.C.S. § 523 (Lexis 2014)
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not
discharge an individual debtor from any debt . . . unless excepting such debt from discharge
under this paragraph would impose an undue hardship on the debtor and the debtor's dependents,
for: an educational benefit overpayment or loan made, insured, or guaranteed by a governmental
unit, or made under any program funded in whole or in part by a governmental unit or nonprofit
institution; or an obligation to repay funds received as an educational benefit, scholarship, or
stipend; or any other educational loan that is a qualified education loan, as defined in section
221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual . . . .”
11 U.S.C.S. § 727(b) (Lexis 2014)
“Except as provided in section 523 of this title, a discharge under subsection (a) of this section
discharges the debtor from all debts that arose before the date of the order for relief under this
chapter, and any liability on a claim that is determined under section 502 of this title] as if such
claim had arisen before the commencement of the case, whether or not a proof of claim based on
any such debt or liability is filed under section 501 of this title, and whether or not a claim based
on any such debt or liability is allowed under section 502 of this title.”
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20 U.S.C.S. § 1087a (Lexis 2014)
“In general. There are hereby made available, in accordance with the provisions of this part such
sums as may be necessary (1) to make loans to all eligible students (and the eligible parents of
such students) in attendance at participating institutions of higher education selected by the
Secretary, to enable such students to pursue their courses of study at such institutions during the
period beginning July 1, 1994. Loans made under this part shall be made by participating
institutions, or consortia thereof, that have agreements with the Secretary to originate loans, or
by alternative originators designated by the Secretary to make loans for students in attendance at
participating institutions (and their parents); and (2) for purchasing loans under section.”
20 U.S.C.S. § 1087e (Lexis 2014)
“Design and selection. Consistent with criteria established by the Secretary, the Secretary shall
offer a borrower of a loan made under this part a variety of plans for repayment of such loan,
including principal and interest on the loan. The borrower shall be entitled to accelerate, without
penalty, repayment on the borrower's loans under this part. The borrower may choose . . . an
income contingent repayment plan, with varying annual repayment amounts based on the income
of the borrower, paid over an extended period of time prescribed by the Secretary, not to exceed
25 years, except that the plan described in this subparagraph shall not be available to the
borrower of a Federal Direct PLUS loan made on behalf of a dependent student . . . .”
26 U.S.C.S. § 108 (Lexis 2014)
“In general. Gross income does not include any amount which (but for this subsection) would be
includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the
taxpayer if . . . the discharge occurs when the taxpayer is insolvent . . . .”
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RELEVANT FEDERAL REGULATIONS
34 C.F.R. § 685.204 (2010)
“A Direct Unsubsidized Loan, Direct Unsubsidized Consolidation Loan, Direct PLUS Loan, or
Direct PLUS Consolidation Loan borrower who meets the requirements described in paragraphs
(b) through (j) of this section is eligible for a deferment during which periodic installments of
principal need not be paid but interest does accrue and is capitalized or paid by the borrower. At
or before the time a deferment is granted, the Secretary provides information, including an
example, to assist the borrower in understanding the impact of capitalization of accrued, unpaid
interest on the borrower's loan principal and on the total amount of interest to be paid over the
life of the loan.”
34 C.F.R. § 685.205 (2010)
“’Forbearance’ means permitting the temporary cessation of payments, allowing an extension of
time for making payments, or temporarily accepting smaller payments than previously
scheduled. The borrower has the option to choose the form of forbearance. Except as provided in
paragraph (b)(9) of this section, if payments of interest are forborne, they are capitalized. The
Secretary grants forbearance if the borrower or endorser intends to repay the loan but requests
forbearance and provides sufficient documentation to support this request . . . .”
34 C.F.R. § 685.208 (2010)
“Under the income-contingent repayment plan described in § 685.209(a), the required
monthly payment for a borrower who has a partial financial hardship is limited to no more than
10 percent of the amount by which the borrower's AGI exceeds 150 percent of the poverty
guideline applicable to the borrower's family size, divided by 12. The Secretary determines
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annually whether the borrower continues to qualify for this reduced monthly payment based on
the amount of the borrower's eligible loans, AGI, and poverty guideline.
Under the income-contingent repayment plan described in § 685.209(b), a borrower's
monthly repayment amount is generally based on the total amount of the borrower's Direct
Loans, family size, and AGI reported by the borrower for the most recent year for which the
Secretary has obtained income information.
For the income-contingent repayment plan described in § 685.209(b), the regulations in
effect at the time a borrower enters repayment and selects the income-contingent repayment plan
or changes into the income-contingent repayment plan from another plan govern the method for
determining the borrower's monthly repayment amount for all of the borrower's Direct Loans,
unless--
The Secretary amends the regulations relating to a borrower's monthly repayment amount
under the income-contingent repayment plan; and
The borrower submits a written request that the amended regulations apply to the
repayment of the borrower's Direct Loans.
Provisions governing the income-contingent repayment plans are in § 685.209.”
34 C.F.R. § 685.209 (2010)
“Income-contingent repayment plan: The income-contingent repayment (ICR) plan is an income-
contingent repayment plan under which a borrower's monthly payment amount is generally
based on the total amount of the borrower's Direct Loans, family size, and AGI.
(1) Repayment amount calculation.
The amount the borrower would repay is based upon the borrower's Direct Loan debt
when the borrower's first loan enters repayment, and this basis for calculation does not
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change unless the borrower obtains another Direct Loan or the borrower and the
borrower's spouse obtain approval to repay their loans jointly under paragraph (b)(2)(ii)
of this section. If the borrower obtains another Direct Loan, the amount the borrower
would repay is based on the combined amounts of the loans when the last loan enters
repayment. If the borrower and the borrower's spouse repay the loans jointly, the amount
the borrowers would repay is based on both borrowers' Direct Loan debts at the time they
enter joint repayment.
The annual amount payable by a borrower under the ICR plan is the lesser of—
The amount the borrower would repay annually over 12 years using standard
amortization multiplied by an income percentage factor that corresponds to the
borrower's AGI as shown in the income percentage factor table in a notice
published annually by the Secretary in the Federal Register ; or
20 percent of discretionary income.
For purposes of paragraph (b) of this section, discretionary income is defined as a
borrower's AGI minus the amount of the poverty guideline, as defined in paragraph
(b)(1)(iii)(B) of this section, for the borrower's family size as defined in §
685.209(a)(1)(iv).
For purposes of paragraph (b) of this section, the term "poverty guideline" refers to the
income categorized by State and family size in the poverty guidelines published annually
by the United States Department of Health and Human Services pursuant to 42 U.S.C.
9902(2). If a borrower is not a resident of a State identified in the poverty guidelines, the
poverty line to be used for the borrower is the poverty guideline (for the relevant family
size) used for the 48 contiguous States.
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For exact incomes not shown in the income percentage factor table in the annual notice
published by the Secretary, an income percentage factor is calculated, based upon the
intervals between the incomes and income percentage factors shown on the table.
Each year, the Secretary recalculates the borrower's annual payment amount based on
changes in the borrower's AGI, the variable interest rate, the income percentage factors in
the table in the annual notice published by the Secretary, and updated HHS Poverty
Guidelines (if applicable).
If a borrower's monthly payment is calculated to be greater than $ 0 but less than or equal
to $ 5.00, the amount payable by the borrower is $ 5.00.
For purposes of the annual recalculation described in paragraph (b)(1)(v) of this section,
after periods in which a borrower makes payments that are less than interest accrued on
the loan, the payment amount is recalculated based upon unpaid accrued interest and the
highest outstanding principal loan amount (including amount capitalized) calculated for
that borrower while paying under the ICR plan.
For each calendar year, the Secretary publishes in the Federal Register a revised income
percentage factor table reflecting changes based on inflation. This revised table is
developed by changing each of the dollar amounts contained in the table by a percentage
equal to the estimated percentage changes in the Consumer Price Index (as determined by
the Secretary) between December 1995 and the December next preceding the beginning
of such calendar year.
Examples of the calculation of monthly repayment amounts and tables that show monthly
repayment amounts for borrowers at various income and debt levels are included in the
annual notice published by the Secretary.
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At the beginning of the repayment period under the ICR plan, the borrower must make
monthly payments of the amount of interest that accrues on the borrower's Direct Loan
until the Secretary calculates the borrower's monthly payment amount on the basis of the
borrower's income.”
34 C.F.R. § 685.212 (2010)
“Discharge of a loan obligation”
34 C.F.R. § 685.219 (2010)
“The Public Service Loan Forgiveness Program is intended to encourage individuals to enter and
continue in full-time public service employment by forgiving the remaining balance of their
Direct loans after they satisfy the public service and loan payment requirements of this section.”
