A debtor’s ability to discharge student loan debt gained traction in an October 4, 2018 opinion by Bankruptcy Judge Mary Ann Whipple of Toledo, Ohio. In In re Pierson, 17-3096 (Bankr. N.D. Ohio Oct. 4, 2018), the Bankruptcy Court found that the Chapter 7 debtor, a bi-polar manic-depressive living below the poverty level with two dependents, satisfied the elements required to demonstrate an undue hardship if he were forced to repay his student loans. This is despite the fact that the debtor’s lender approved an income-based repayment plan requiring $0.00 monthly payments.
Under the Brunner test adopted by the Sixth Circuit in 2005, a debtor seeking to invoke the non-dischargeability exception contained in 11 U.S.C. § 523(a)(8) must prove each of the following three elements:
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for [himself] and [his] 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 v. New York State Higher Education Services Corp., 831 F.2d 395, 385 (2d Cir. 1987).
The issue of whether the debtor could sufficiently demonstrate the existence of an undue hardship was hotly contested by his lender. The lender argued that under the first prong of Brunner, no hardship existed because no payment was required. Under the second and third prongs, the lender asserted that despite his established emotional disorder and learning disability, the debtor may become more financially successful if he relocated to another state in order to pursue jobs with a higher earning potential. The lender further argued that without taking this step, the debtor had not made all reasonable efforts to repay his student loan debt.
The fact-intensive trial in the case yielded the following additional facts, which drove Judge Whipple’s finding of an undue hardship: the debtor’s total household net income was only $1,161.00 per month, or, $13,932.00 per year; his home was lacking basic amenities, such as a functioning furnace and stove; he had medical problems and no health insurance with which to pay for medical or dental bills; his annual gross income at age 47 never exceeded $16,985.00 in a given year; he failed a reading test over twenty years ago, and was unable to complete his post-secondary education; finally, after losing his job at a 7-11, despite his learning disability and emotional disorder, he persisted to find his current part-time job as a package handler for FedEx.
Judge Whipple ruled that the debtor met prong one, even though he was approved by the lender for an income-based repayment plan with no payment. While the lender argued that the repayment plan did not require the debtor to alter his standard of living under the plain meaning of the statute, Judge Whipple found that the debtor’s standard of living was nonetheless below the poverty level. With regard to prongs two and three, the court ruled that the debtor was “not acting unreasonably or unfairly to his student loan holder by continuing to make and try to build a life in Toledo.” Evidence that the debtor had made some payment on the loans was also presented, mitigating the third prong. Of equal importance toward the court’s finding of good faith in this case was the fact that the debtor’s bankruptcy filing was not precipitated by the student loans: the debtor filed for relief in reaction to a wage garnishment by a former landlord with a judgment.
This is a significant opinion for debtors who face insurmountable circumstances that prevent them from repaying their student loan debt. It is indicative of the inroads made by debtors whose circumstances warrant the relief available under 11 U.S.C. § 523(a)(8).