by Finding that the debtor’s string of very bad luck unrelieved by his concerted efforts to increase his earnings, satisfied the Brunner test, a bankruptcy court granted him a partial discharge of his student loan, reducing the debt from $440,000 to $8,291.67. Koeut v. U.S. Dept. of Ed., No. 12-7242, Adv. Proc. No. 18-90130 (Bankr. S.D. Cal. Dec. 4, 2020).
The debtor’s family moved to the United States from Cambodia when the debtor was a child. He and his family lived in poverty, yet with the assistance of student loans, he was able to attend Duke University for college and the Ponce School of Medicine in Puerto Rico for a medical degree. His troubles began when, through no fault of his own, he did not match for any residency after he finished medical school. As a result, he had substantial student loan debt and no prospect of working as a doctor. Between 2010 and 2017, he worked a variety of menial jobs earning between approximately $3,000 and $31,000 in annual income. Believing that the taint on his credit record due to the student loans was hampering his efforts to find more lucrative employment, he filed for chapter 7 bankruptcy seeking to obtain a discharge of the loans. At trial, the debtor testified to having applied to over 5,000 jobs since finishing medical school. The DOE presented evidence from a vocational expert that, after ten years experience of appropriate employment such as pharmaceutical salesman or insurance adjuster, the debtor could hope to command a salary of $55,000 to $75,000.
The bankruptcy court began its analysis with United Student Aid Funds v. Pena (In re Pena), 155 F.3d 1108 (9th Cir. 1998), where the Ninth Circuit adopted the three-part Brunner test for determining whether a debtor is entitled to full or partial relief from student loan debt due to undue hardship within the meaning of section 523(a)(8).
Applying the first “mechanical” prong of that test, the court looked to whether the debtor could maintain a minimal standard of living while paying off his loans. The court went through a detailed account of his current income and expenses finding that, despite his concerted efforts to find lucrative employment and his minimal expenses, the debtor’s expenses exceeded his current income. For that reason, the court found the debtor met the first Brunner prong.
The DOE argued that the debtor could not meet the second prong of Brunner by showing that additional circumstances existed to make it likely that his financial difficulties would persist for a “significant portion of the repayment period.”
Noting that the circumstances need not be exceptional, the court listed a dozen factors it may consider when addressing this Brunner prong. The court found the first four factors—debtor’s lack of physical or mental disability, as well as his advanced education—argued against discharge of his loans. The remaining factors, however, led to a different result. Those factors included the debtor’s lack of a reserve of funds, the fact that his future employment prospects depended on incurring the additional expense of retraining, and his willingness over the years to take any type of employment he could find. The court further found that, realistically, the debtor could hope to achieve a salary of only $55,000 in ten years. Balancing that against the IRS standard expenses, the court found that, with the burden of the student loans hampering his progress, the debtor’s inability to repay the loans was likely to persist. In fact, the court found that the most the debtor would be able to repay would be $8,291.67.
The court then turned to the third prong of Brunner under which the debtor must show good faith in his attempts to repay his student loans. Under this prong, a court looks at the debtor’s efforts to obtain employment, minimize expenses, and maximize income. Here, the DOE argued that, in order to demonstrate good faith, the debtor had an obligation to take advantage of the IBR and the federal REPAYE program which would have reduced his obligation to repay the loan based on his income and expenses, and, after twenty-five years, would result in forgiveness of the remaining amount due.
The court found that it was not bad faith for the debtor to decline to pursue these avenues of relief as the burden of the unpaid loan and its effect on his credit rating was a factor in his inability to gain employment. Further, the tax consequences of the loan forgiveness at the end of twenty-five years would merely create a new financial burden. The fact that the debtor had previously explored and attempted to comply with an IBR, supported his assertion of good faith.
Concluding that the debtor met the three prongs of Brunner, the court granted partial discharge of the debtor’s student loans leaving only $8,291.67 to be paid in monthly payments of $41.87 from the years 2031 to 2048.