Where neither the debtor nor the creditor presented sufficient evidence to establish or counter the three prongs of the Brunner undue hardship test, neither was entitled to summary judgment on the debtor’s adversary complaint seeking discharge of his student loan. Rosenberg v. ECMC, No. 20-688 (S.D. N.Y. Sept. 29, 2021).
The debtor financed his undergraduate and law school degrees in part with student loans. He worked for a time as a lawyer but found the work unsatisfying and quit to open his own business dealing in outdoor equipment sales and tours. At the time he filed for chapter 7 bankruptcy his consolidated student loans had grown to over $220,000.00. He was 45 years old, never married, and had no dependents, but had suffered an injury requiring surgery. It was undisputed that the debtor’s monthly expenses were $4,005.00 and his monthly income $2,456.24. The debtor filed an adversary complaint seeking to discharge his student loan as an undue hardship under section 523(a)(8). Both the debtor and the creditor, ECMC, filed motions for summary judgment. The bankruptcy court granted judgment in favor of the debtor and denied ECMC’s motion. ECMC appealed to the District Court for the Southern District of New York.
Observing that Congress intended student loans to be more difficult to discharge than other debts, the district court confirmed that the second circuit continues to apply the three-part Brunner test established in 1987. Under that test, “the proper inquiry is whether it is unconscionable to require debtor to earn more income or reduce expenses in order to repay the debt. In re Shenk, 603 B.R. 671, 678 (Bankr. N.D.N.Y. 2019) (quoting In re Wells, 380 B.R. 652, 659 (Bankr. N.D.N.Y. 2007)).”
The court found that under the first prong of the Brunner test, the debtor must show that he cannot pay off his student loan and maintain a minimal standard of living. Under this prong, “courts focus on a debtor’s household income and expenses to determine what expenses are necessary for the debtor to meet [his] basic needs, such as food, shelter, clothing, transportation and medical treatment for [himself] and any dependents before repaying the student loan debt. Additionally, courts consider whether a debtor has sought to maximize [his] ability to earn adequate income to pay for expenses and student loans while minimizing certain discretionary expenses.” Courts also consider whether the debtor is eligible for an income-based repayment program that would place the loan payments within his budget.
Here, the court reviewed the debtor’s undisputed list of expenses and found that the debtor failed to established that they were necessary to maintain a minimal standard of living. Nor did he show that he could not pay off the loan and maintain that standard of living, particularly in light of the fact that he had refused to consider an income-based repayment plan.
[In a footnote, the court took issue with the bankruptcy court’s finding that because the loan was in default, the acceleration clause was triggered and the proper inquiry for the first prong of Brunner was whether the debtor could immediately pay the loan in its entirety.]
While the court found the debtor failed to justify his expenses or his reluctance to enter into an income-based repayment program, it also found that ECMC failed to challenge the expenses except in broad terms relating to the debtor’s lack of legal work and his choice of living arrangements. The court found that ECMC should have presented a fact-intensive assessment of the debtor’s expenses and income. Therefore, the court found neither party was entitled to summary judgment on the first Brunner prong.
Turning to the second prong of the test—whether there were additional circumstances that were likely to persist—the court noted that the circumstances must be exceptional and beyond the debtor’s control. Here, “courts may consider a debtor’s medical condition, disability, or responsibility for his or her dependents. Courts have also considered a debtor’s assets, career, income or potential for increased career and financial opportunities, and whether a debtor has maximized [his] income potential, has more lucrative job skills, has limited working years left, and whether there are factors that would prevent the debtor from retraining or relocating.”
The debtor argued that he met this prong by showing that he had an injury that impacted his ability to work, and that the retail industry had collapsed and showed no signs of recovery. The court was unpersuaded in large part because the debtor failed to document the extent and impact of his physical injury and subsequent surgeries. The debtor also failed to raise a legitimate challenge to the vocational report in which a number of potential jobs, such as paralegal or legal assistant, were raised as income-increasing alternatives to running his own outdoor touring business. For that reason, the court found the debtor was not entitled to summary judgment.
Again, however, except to claim that the debtor’s inadequate income was a “monster of his own making,” ECMC failed to demonstrate the contrary position that the debtor could obtain higher paying employment. Therefore, ECMC was likewise not entitled to summary judgment.
The court turned to the final prong of Brunner—whether the debtor made a good faith attempt to repay the loan. Under this prong, the court looks at whether the debtor minimized expenses, maximized income, and took advantage of any income-based repayment program. The court found the debtor’s move to a more expensive house, his failure to seek and maintain a job in law, and his refusal to take part in a reduced repayment plan, all militated against summary judgment on this issue.
However, ECMC likewise failed to present evidence in support of its motion for summary judgment. For instance, the court found ECMC could have provided evidence of the reasons for the debtor’s deferments and forbearances, how the debtor spent money that could have been used to pay the loans, and the impact of the debtor’s injuries on his ability to repay the loan.
The court received three amicus briefs (Legal Services NYC Bankruptcy Assistance Project, New York State Department of Financial Services, and Veterans Education Services) urging it to reinterpret the Brunner test and affirm the bankruptcy court, but it found the briefs “unhelpful” as it was bound by precedent. It noted that the policy arguments were best addressed to Congress.
In sum, the court found that while the debtor failed to meet his burden of proof of undue hardship justifying summary judgment in his favor, ECMC likewise failed to offer evidence which would allow the court to grant summary judgment in its favor.
The court reversed the order of summary judgment in favor of the debtor, affirmed denial of summary judgment with respect to ECMC, and remanded to the bankruptcy court.
Tags: Student loans
