Second Circuit Cancels Bankruptcy Court Discharge of Student Loan Debt Under Brunner

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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 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 unreliable 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;

  • whereas there are additional circumstances indicating that this state of affairs is likely to persist for a substantial part of the period of repayment of student loans; 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 get rid of 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 found that the debtor was qualified to have his student loan debt discharged. 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 the release of his student loan. The issue was in court on the summary judgment counterclaims. 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 in the bankruptcy court ruling was (1) the debtor’s undisputed income and expense statement showed negative monthly income of approximately $ 1,500 (tier one); (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:

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.

© 2021 Bradley Arant Boult Cummings LLPRevue nationale de droit, volume XI, number 333


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