NBC Letter to the U.S. Department of Education Re: Docket ID ED-2017-OPE-0085 –
The National Bankruptcy Conference urges the U.S. Department of Education to adopt a plain-meaning construction of section 523(a)(8) when evaluating student loan discharge claims based on undue hardship. The NBC argues that the current Brunner test standard is arbitrary and inconsistent, imposes excessive litigation burdens on financially distressed debtors, and diverges from the statutory language and the 1973 Commission Report's original intent.
- The Department of Education should adopt plain statutory meaning of 'undue hardship' rather than the restrictive Brunner test applied by nine Circuit Courts of Appeal.
- Current undue hardship standards requiring proof of 'certainty of hopelessness' are arbitrary, inconsistent across courts, and deny the fresh start principle to similarly situated debtors.
- The 1973 Commission Report defines undue hardship as inability to maintain minimal standard of living while repaying loans, focusing on present/future condition rather than past repayment efforts.
May 22, 2018
Ms. Jean-Didier Gaina
U.S. Department of Education
Office of Postsecondary Education
400 Maryland Avenue, S.W.
Washington, DC 20202
Re: Docket ID ED-2017-OPE-0085 - Evaluating Undue Hardship Claims in Bankruptcy
Dear Ms. Gaina,
The National Bankruptcy Conference (“NBC”) is a voluntary, nonpartisan, notfor-profit organization composed of about 60 of the nation’s leading bankruptcy judges, professors and practitioners. It was organized at the request of Congress and has provided advice to Congress on bankruptcy legislation for nearly 80 years. We enclose a Fact Sheet, which provides further information about the NBC.
We write on behalf of the NBC to urge the Department of Education to consider the following factors in evaluating undue hardship claims asserted by debtors.
The Department should adopt a plain meaning construction of section
523(a)(8) in evaluating undue hardship.
If an educational debt falls within the coverage of section 523(a)(8), it may be discharged only if the bankruptcy court determines that “excepting such debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents.” In the years following the enactment of the Bankruptcy Code, nine of the Circuit Courts of Appeal have adopted a similar test for determining “undue hardship.” It is often referred to as the “Brunner” test, as it was first developed by the Second Circuit in Brunner v. New York State Higher Educ. Servs. Corp.1
The Brunner test requires the debtor to show that:
- 1.the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the student loans;
- 2.additional circumstances exist indicating that the hardship is likely to persist for a significant portion of the repayment period of the student loans; and
- 3.the debtor has made a good-faith effort to repay the loans.2
831 F.2d 395 (2d Cir. 1987).
Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752 (S.D.N.Y. 1985), aff’d, 831 F.2d 395 (2d Cir. 1987).
Ms. Jean-Didier Gaina U.S. Department of Education May 22, 2018
The current “undue hardship” method of discharge is random, arbitrary and unfair.3 Some courts have required a showing of a “certainty of hopelessness” or “extraordinary circumstances” in applying Brunner’s second prong, which looks at additional circumstances showing that the hardship is likely to persist.4 In requiring debtors to prove a “certainty of hopelessness,” debtors are faced with the impossible task of proving a negative – “They must somehow prove that their future is as hopeless as their present.”5
Debtors are required to litigate undue hardship in a separate adversary proceeding. This requires filing a complaint, often responding to extensive discovery by student loan holders, and preparing and offering evidence for trial. Most debtors have few, if any, resources to pay for legal representation. Those who are truly financially distressed and desperately need relief are often unable to afford the costs of this litigation. Such proof requirements and litigation burdens deny the fresh start potential inherent in the Bankruptcy Code to many debtors burdened with student loan debt.
The Seventh Circuit has observed that requiring such demanding forms of proof may not be consistent with section 523(a)(8), noting that it is “important not to allow judicial glosses of the statutory language, such as the language in [Brunner], to supersede the statute itself.”6
The phrase “undue hardship” is not defined in the Bankruptcy Code. The House and Senate Reports issued in connection with the enactment of the Bankruptcy Code do not provide any discussion of the meaning of “undue hardship.” One court observed that the phrase was “lifted verbatim from the draft bill proposed by the Commission on the Bankruptcy Laws of the United States,”7 and the Commission Ms. Jean-Didier Gaina U.S. Department of Education May 22, 2018
Report was relied upon by Congress in drafting certain provisions of the Bankruptcy Code.8 The 1973 Commission Report describes “undue hardship” as follows:
In order to determine whether nondischargeability of the debt will impose an “undue hardship” on the debtor, the rate and amount of his future resources should be estimated reasonably in terms of ability to obtain, retain, and continue employment and the rate of pay that can be expected. Any unearned income or other wealth which the debtor can be expected to receive should also be taken into account. The total amount of income, its reliability, and the periodicity of its receipt should be adequate to maintain the debtor and his dependents, at a minimal standard of living within their management capability, as well as to pay the education debt.9
The 1973 Commission Report focuses on the debtor's inability to maintain a minimum standard of living while repaying the loans. It refers to a debtor maintaining this “minimal standard of living” based on “adequate” income. The Report also focuses on the debtor’s present and future condition. It does not refer to any of the debtor’s pre-bankruptcy past, such as the debtor’s attempts to repay the student loans or her decision to incur student loan debt. Significantly, it does not use phrases such as “certainty of hopelessness” or “total incapacity.”
In providing guidance to student loan holders on whether to oppose a debtor’s request for an undue hardship discharge, we urge the Department to adopt a plain meaning construction of words of the statute, similar to that provided in the 1973 Commission Report. Loan holders should not demand proof of “certainty of hopelessness” or “total incapacity.” A debtor burdened with unmanageable student loan debt should be able to obtain a discharge of that debt by showing its repayment would prevent the debtor from satisfying ordinary and necessary living expenses, and that this condition is not likely to change in the foreseeable near future.
In evaluating whether hardship is likely to persist, the relevant time period should not exceed ten years.
The Brunner court described the relevant time frame for consideration of the second prong to be “a significant portion of the repayment period of the student loans.”10 Thus, the period for consideration should not exceed beyond the contractual loan repayment period, which generally does not exceed ten years.11 The Department and loan holders should not evaluate future hardship over the much longer Ms. Jean-Didier Gaina U.S. Department of Education May 22, 2018 twenty or twenty-five period the debtor might possibly be on an administrative income-driven repayment plan. The court in In re Price accurately describes the problems with using a time period that extends beyond the contractual loan repayment period:
[T]he need to preserve the integrity of the judicial process favors the use of the contractual loan term rather than a lengthy extended loan term. Court cases should be decided in a clear and comprehensible way. Those analyzing a debtor's future financial situation under the second prong of Brunner “should base their estimation of a debtor's prospects on specific articulable facts, not unfounded optimism.” (citations omitted). Use of a twenty (20) or twenty-five (25) year extended term as the repayment period under Brunner arguably requires that the court predict what the debtor's circumstances will be ten (10) or fifteen (15) years into the future. In many cases, such determinations will be nothing more than mere guesswork, without any reasonable degree of certitude. Such a failure to engage in a grounded, realistic analysis not only creates the danger of an overly-strict application of Brunner, but also raises legitimate concerns about both the integrity of the judicial decision making process, as well as the public's perception of the process.12
The debtor’s inability to complete education should be a significant factor in evaluating undue hardship claims.
Many student loans are for ineffective educational programs or programs that the debtor never completes, from which the debtor reaps no benefit. As the Government Accounting Office stated in a report to Congress in 1997, “many student borrowers have little or no means to repay their loans because they attended poor quality proprietary schools that failed to provide them with marketable skills.”13 Similar problems arise if the debtor has not finished a vocational school, either because the school closed or because the debtor was unable to complete the course due to financial stress, lack of aptitude, or any other reason.
It has been reported that almost half of all students who enter college do not graduate and receive a degree.14 Students who have some college but do not obtain a degree often struggle with student loan Feb. 19, 2015)(the standard student loan repayment period is ten years and the Brunner court could not have contemplated a longer period given the law at the time).
Ms. Jean-Didier Gaina U.S. Department of Education May 22, 2018
debt. In 2007, more than 43 percent of debtors in bankruptcy had some post-secondary education but did not earn a four-year college degree, and these debtors who did not complete their educations owed virtually the same amount of student loan debt as borrowers who earned degrees.15
The Department should provide in guidance to loan holders that the debtor’s lack of school completion should be a significant factor in evaluating undue hardship claims.
The evaluation of undue hardship should be forward-looking only.
The Department and loan holders have questioned the debtor’s reasons for incurring student loan debt in undue hardship litigation. They have argued that the student should be responsible for any decisions to incur debt that later fail to improve the debtor’s financial situation. For example, the loan holder in a recent case argued that the debtor, a special education teacher, should have realized that she would not benefit from incurring student loan debt to obtain advanced degrees because she had already reached the highest pay in her school system and there were no further opportunities for advancement.16 This argument was rejected on appeal by the Eleventh Circuit:
As noted, the second prong is a forward-looking test that focuses on whether a debtor has shown her inability to repay the loan during a significant portion of the repayment period. It does not look backward to assess blame for the student debtor's financial circumstances. Thus, even if the court concludes that a debtor has acted recklessly or foolishly in accumulating her student debt, that does not play into an analysis under the second prong.17
The Debtor’s participation in an income-driven repayment plan should be a consideration only if it
would result in significant repayment of the student loan debt.
The Department and loan holders often argue that if debtors qualify for a zero-dollar monthly payment under an income-driven repayment plan, they cannot establish hardship and are not entitled to a bankruptcy discharge of their student loans. This blocks debtors most in need of relief from burdensome student loan debt from ever obtaining a bankruptcy discharge. The Department’s position fails to further the apparent policy objective of student loan nondischargeabilty in promoting repayment of student loans. If the debtor would have a zero-dollar or nominal payment under an income-driven repayment plan, and it is more likely than not that the debtor’s financial situation will not improve, loan holders should consent to an undue hardship discharge.
A change in the Department’s policy that would encourage settlement of undue hardship cases should not have a significant impact on participation in the Department’s income-driven repayment programs. Consumers generally do not file bankruptcy if there are manageable ways for them to deal with their debt burden. Even consumers who would benefit from bankruptcy often do not file because of the stigma and challenges associated with filing bankruptcy. A RAND study of American families during the Great Recession found that by April 2010, 39 percent of households had experienced financial distress.18 However, there were only 1.54 million nonbusiness bankruptcies in 2010, which was less than 1.4 percent of the 116.7 million households in 2010. Despite slow economic recovery from 2010 to 2015, bankruptcy filing rates continued to decline, with 819,760 nonbusiness bankruptcy filings in 2015.19
The Department should consider certain categories of debtors to be presumptively entitled to discharge.
For certain categories of debtors, the Department and loan holders should determine that they are presumptively entitled to an undue hardship discharge. For example, if the debtor’s bankruptcy schedules establish that they are below 150% of poverty guidelines, and the debtor has no reasonable prospect for more gainful employment or income, loan holders should consent to an undue hardship discharge.
The Department should consider the potential recovery from the debtor if the discharge is denied in relation to the expected costs of opposing the discharge.
The Department’s current regulations consider the expected costs of opposing the discharge and the total amount of the debt. If the loan holder determines that repayment will not impose an undue hardship, it must then conduct this cost assessment of opposing the discharge.20 The formula used in the current regulation is whether the expected costs of opposing the discharge exceeds one-third of the total student loan debt.
We believe this assessment is inadequate as it fails to consider whether the debtor’s student loan debt will be collectable if the discharge is denied. The Department should revise the formula to include as a factor the anticipated recovery from the debtor if the loans are not discharged.
Very truly yours,
Jane L. Vris, Chair
National Bankruptcy Conference
A non-profit, non-partisan, self-supporting organization of approximately sixty lawyers, law professors and bankruptcy judges who are leading scholars and practitioners in the field of bankruptcy law. Its primary purpose is to advise Congress on the operation of bankruptcy and related laws and any proposed changes to those laws.
History. The National Bankruptcy Conference (NBC) was formed from a nucleus of the nation’s leading bankruptcy scholars and practitioners, who gathered informally in the 1930’s at the request of Congress to assist in the drafting of major Depression-era bankruptcy law amendments, ultimately resulting in the Chandler Act of 1938. The NBC was formalized in the 1940’s and has been a resource to Congress on every significant piece of bankruptcy legislation since that time. Members of the NBC formed the core of the Commission on the Bankruptcy Laws of the United States, which in 1973 proposed the overhaul of our bankruptcy laws that led to enactment of the Bankruptcy Code in 1978, and were heavily involved in the work of the National Bankruptcy Review Commission (NBRC), whose 1997 report initiated the process that led to significant amendments to the Bankruptcy Code in 2005.
Current Members. Membership in the NBC is by invitation only. Among the NBC’s 60 active members are leading bankruptcy scholars at major law schools, as well as current and former judges from eleven different judicial districts and practitioners from leading law firms throughout the country who have been involved in most of the major corporate reorganization cases of the last three decades. The NBC includes leading consumer bankruptcy experts and experts on commercial, employment, pension, mass tort and tax related bankruptcy issues. It also includes former members of the congressional staff who participated in drafting the Bankruptcy Code as originally passed in 1978 and former members and staff of the NBRC. The current members of the NBC and their affiliations are set forth on the second page of this fact sheet.
Policy Positions. The Conference regularly takes substantive positions on issues implicating bankruptcy law and policy. It does not, however, take positions on behalf of any organization or interest group. Instead, the NBC seeks to reach a consensus of its members - who represent a broad spectrum of political and economic perspectives - based on their knowledge and experience as practitioners, judges and scholars. The Conference’s positions are considered in light of the stated goals of our bankruptcy system: debtor rehabilitation, equal treatment of similarly situated creditors, preservation of jobs, prevention of fraud and abuse, and economical insolvency administration. Conferees are always mindful of their mutual pledge to “leave their clients at the door” when they participate in the deliberations of the Conference.
Technical and Advisory Services to Congress. To facilitate the work of Congress, the NBC offers members of Congress, Congressional Committees and their staffs the services of its Conferees as non-partisan technical advisors. These services are offered without regard to any substantive positions the NBC may take on matters of bankruptcy law and policy.
Footnotes
- 1. 831 F.2d 395 (2d Cir. 1987).
- 2. Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752 (S.D.N.Y. 1985), aff’d, 831 F.2d 395 (2d Cir. 1987). PMB 124, 10332 MAIN STREET • FAIRFAX, VA 22030-2410 • TEL: 434-939-6008 • FAX: 434-939-6030 E-mail: info@nbconf.org • Website: www.nationalbankruptcyconference.org
- 3. Rafael I Pardo & Michelle R. Lacey, Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt, 74 U. Cin. L. Rev. 405 (Winter 2005). From an evaluation of hundreds of published undue-hardship decisions applying the Brunner standard, the authors conclude that Brunner is not effective as a predictable and reliable legal standard. Debtors similarly situated by demographics and financial circumstances are typically not treated the same when different courts apply the standard. The authors conclude that “those debtors granted a discharge and those denied a discharge predominantly resemble one another and that there are few statistically significant differences in the factual circumstances of the two groups.” Id.
- 4. E.g., In re Oyler, 397 F.3d 382, 386 (6th Cir. 2005); In re Gerhardt, 348 F.3d 89 (5th Cir. 2003); In re Spence, 541 F.3d 538 (4th Cir. 2008); Goulet v. Educational Credit Mgmt. Corp., 284 F.3d 773, 778 (7th Cir. 2002); In re Brunner, 46 B.R. 752, 755 (S.D. N.Y. 1985) (“dischargeability of student loans should be based upon the certainty of hopelessness”).
- 5. Testimony of Deanne Loonin, Hearing on the Private Student Loan Bankruptcy Fairness Act of 2010, before the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Commercial and Administrative Law, April 22, 2010.
- 6. Krieger v. Educ. Mgmt. Corp., 713 F.3d 882, 884 (7th Cir. 2013).
- 7. ECMC v. Polleys, 356 F.3d 1302, 1306 (10th Cir. 2004).
- 8. See S. Rep. No. 95-989, at 1-2 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5787-88; Kenneth N. Klee, Legislative History of the New Bankruptcy Law, 28 DePaul L. Rev. 941, 943 n.20 (1979).
- 9. Report of the Comm'n on the Bankr. H.R. Doc. No. 93-137, Pt. II § 4-506 (1973).
- 10. Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987). See also Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1310 (10th Cir. 2004)(under second Brunner prong, “inquiry into future circumstances should be limited to the foreseeable future, at most over the term of the loan”).
- 11. In re Price, 573 B.R. 579 (Bankr. E.D. Pa. 2017), rev’d on other grounds, DeVos v. Price, 2018 WL 558464 (E.D. Pa. Jan. 24, 2018); In re Johnson, 2015 WL 795830 * 9 (Bankr. D. Kan.
- 12. In re Price, 573 B.R. 579, 604 (Bankr. E.D. Pa. 2017), rev’d on other grounds, DeVos v. Price, 2018 WL 558464 (E.D. Pa. Jan. 24, 2018).
- 13. United States General Accounting Office, Debt Collection – Improved Reporting Needed On Billions Of Dollars In Delinquent Debt And Agency Collection Performance, Report to the Chairman, Committee on Budget, House of Representatives, 1997 WL 358072, GAO/AIMD 97- 48 (Fed. Doc. Clearing House June 2, 1997); quoted in the Report of the National Bankruptcy Review Commission, Oct. 20, 1997, volume 1, p. 215.
- 14. Report of American Enterprise Institute based on data reported to the Education Department by nearly 1,400 schools regarding full-time and first-time students who entered in the fall 2001, as
- 15. Katherine M. Porter, College Lessons: The Financial Risks of Dropping Out, University of California - Irvine School of Law, January 9, 2012.
- 16. In re Acosta-Conniff, 686 F. App'x 647 (11th Cir. 2017).
- 17. Id. at 650.
- 18. RAND Labor and Population, Effects of the Financial Crisis and Great Recession on American Households, Michael Hurd and Susann Rohwedder, Nov. 2010. The study measured financial distress by considering the following factors: if the respondent and/or spouse is unemployed, or if the household is more than two months behind on mortgage payments (or in foreclosure), or if the value of the house is less than the amount of the mortgage.
- 19. Administrative Office of the U.S. Courts, U.S. Bankruptcy Courts—Business and Nonbusiness Cases Filed, by Chapter of the Bankruptcy Code, District, and County—During the 12-Month Period Ending December 31, 2015.
- 20. See 34 CFR § 682.402(i)(1) and 34 CFR § 674.49(c)(5).