A district court judge recently overturned and returned a well-known bankruptcy decision paying off a large student loan debt. In the Southern District of New York, Judge Philip Halpern, reviewing the bankruptcy court’s de novo summary judgment decision, find that neither the debtor nor the defendant was entitled to summary judgment under Brunner test.
Previous bankruptcy court ruling
On January 7, 2020, Chief Bankruptcy Judge Cecelia Morris of the Southern District of New York Bankruptcy Court issued a ruling stating that “[t]his court will not participate in perpetuating these myths. In re Rosenberg, 610 BR 454 (SDNY bank 2020). The “myth”, as described by Morris J., is the severe standard imposed by the Brunner student debt exemption test. Generally, student loan debt is presumed not dischargeable in bankruptcy. The exception is when a debtor can prove that “to exclude such debt from discharge… would impose undue hardship on the debtor and his dependents” (11 USC § 523 (a) (8)). The second circuit in Brunner v. NY State Higher Educ. Serves. Corp. (In concerning Brunner), 831 F.2d 395 (2d Cir. 1987), sets out the following test for “undue hardship”:
- That the debtor cannot maintain, on the basis of his current income and expenses, a “minimum” standard of living for himself and his dependents if he is forced to repay the loans;
- That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the student loan repayment period; and
- That the debtor made good faith efforts to repay the loans.
Justice Morris denounced the “harsh results” often associated with Brunner, which she described as arising from “punitive dicta” in case law interpreting Brunner instead of Brunner himself. Morris J. sought to do away with this “quasi-standard of mythical proportion”, instead endeavoring to “apply the Brunner test as originally planned.
After the above comment on the too harsh interpretation of Brunner, the court analyzed the three-part test and concluded that the debtor was qualified to have his student debt paid. The debtor’s undergraduate and law school loan debt became a federal consolidation loan totaling $ 221,385. The debtor initiated adversarial proceedings in order to obtain payment of his student loan. The issue was in court on counterclaims for summary judgment. Morris J. rendered summary judgment for the debtor, finding that the debtor had satisfied the Brunner test, the student loans imposed undue hardship and, therefore, discharged the debtor’s student loan debt. A critical element to the bankruptcy court‘s decision was (1) the debtor’s undisputed income and expense statement showed negative monthly income of approximately $ 1,500 (one component); (2) the current situation of the debtor was likely to persist for a significant part of the repayment period because the loan debt was accelerated, therefore, the repayment period was over (second phase); and (3) the debtor made good faith efforts to repay his loans because he made approximately 40% of his payments during the 26 months he was responsible for the payments (tier three).
District judge disagrees
After the defendant’s appeal, the district court set aside the grant of summary judgment for the debtor, upheld the dismissal of the defendant’s counterclaim for summary judgment and remanded it. Judge Halpern broke down the three Brunner elements:
- Minimum standard of living
- The debtor did not bear his burden. While the debtor’s income and expense statement showed negative monthly income of around $ 1,500 and was not in dispute, Judge Halpern stressed that the debtor must do more to demonstrate sufficient at first Brunner First, the debtor must provide a “substantial explanation” as to the necessity of its expenditure. Second, the debtor must show how he would be unable to pay the student loan according to the repayment plans available and maintain a minimum standard of living.
- The Respondent’s “summary analysis” also failed to substantively demonstrate the need for the Applicant’s expenses or his ability to maintain a minimum standard of living.
- Additional circumstances likely to persist
- Halpern J. rejected the bankruptcy court‘s argument that the debtor had satisfied part two by showing that the loan had been accelerated. First, Halpern J. noted that there was no admissible evidence to support this conclusion. Second, even if there were, the debtor had the option of rehabilitating the loan. In addition, the debtor’s claims that he suffered injuries and that his future employment prospects were poor were not supported by admissible evidence.
- The defendant simply stated that the debtor’s situation was a “monster of its own making”, but did not address the factual issues of the potential impact of the harm on the debtor’s future earning potential.
- Halpern J. noted that this branch requires that the debtor’s condition be the result of factors beyond its control and ultimately concluded that the “constellation of evidence” suggests a lack of good faith. Specifically, (1) during the approximately 10-year period the debtor moved between forbearance and deferral, had enough money to leave New York to rent a two-bedroom house, but did made less than $ 3,000 on student loan payments on a debt that grew from about $ 116,000 to over $ 220,000; (2) the debtor has abandoned his legal career; (3) he filed for bankruptcy for the express purpose of paying off his student loan debt; and (4) he said he had no interest in rehabilitating the debt through a repayment program.
- The defendant also failed to consider gaps in the evidence, including arguments regarding the reason for the debtor’s stays and abstentions, where the debtor’s income went if not to pay off the student loans, and the significance of the alleged injuries. of the debtor.
To take with
To success Brunner, releases for undue hardship for student debt are rare. The debtor’s apparent victory in bankruptcy court was short-lived after the district court reviewed the decision and came to a different conclusion on each of the items. This is another chapter of the case law applying the Brunner Standard. Participants in the student loan space should keep an eye on the final outcome of the Rosenberg case now that it was fired.