6th Circuit Bankruptcy Judge Whipple Applies Brunner Test to Discharge Student Loan Debt of Functionally Illiterate Debtor

I have written before about the mounting student loan debt problem in America and the challenges this problem presents Debtors and lenders under the current Bankruptcy Code. 

In In Re Pierson [1] Judge Mary Ann Whipple of the 6^th Circuit (Toledo, Ohio) held that eligibility for an income-based repayment (“IBR”) program does not preclude a debtor from discharging student loans, especially when a debtor is living below the poverty line. In her opinion, Judge Whipple rejects most of the arguments lenders have been making in similar student debt discharge cases concerning a debtor’s general “ability” to make IBRs.

In Pierson, the functionally illiterate Debtor had incurred $15,000 in student loans from 1996-1997 while studying car mechanics. He did not graduate, and he did not work as a mechanic.

The Debtor suffered from bipolar disorder and had spent part of his life living out of a car. Employed part time, he earned about $14,000 a year, which Judge Whipple described as “living in poverty.” His wife earned about $230 a month cleaning houses. The Debtor, his wife, and his teenage step-daughter lived in a mobile home that lacked both a furnace and an operable stove.

Despite these circumstances, the 47-year-old Debtor was eligible for an IBR program where he would not be required to make payments toward his student loans given his income, and, assuming his income did not rise, his loans would be forgiven in about 22 years. The student loan debt forgiveness, however, might become taxable income.

The Sixth Circuit has adopted the Brunner test  to evaluate whether a debtor has shown an undue hardship and, therefore, that the debtor’s student loans are dischargeable under Section 523(a)(8) of the Bankruptcy Code.[2] Specifically, the Brunner test requires a showing that: (1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; (2) 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) the debtor has made good faith efforts to repay the loans.[3]

Because the Debtor could pay nothing under an IBR program, the lender argued the student loans imposed no undue hardship under the first prong of Brunner because no payment was required. Judge Whipple observed, however, that the IBR program is “neither automatic nor permanent” but requires continual reapplication, which could be beyond the capacity of some debtors.  While citing to cases that have come down on both sides of this fence, Judge Whipple reasoned that if eligibility for the program precluded the discharge of student loans “the hardship discharge provision for student loans would be effectively eliminated for those most likely to be entitled to it.” Accordingly, Judge Whipple concluded that the Debtor satisfied the first prong of the Brunner test, even though he was eligible to pay nothing.

As to the second and third prongs, the lender argued that the Debtor should move to another town in pursuit of higher income. Judge Whipple rejected this argument, noting the Debtor’s statement that he would lose his wife if he moved, and that the Debtor’s “support system” was in Toledo, where he lived. Judge Whipple concluded 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.” Additionally, Judge Whipple noted if he were to obtain a second part-time job, his poverty would continue because the increased income would end his eligibility for food stamps and leave him with no more net disposable income.

Further, Judge Whipple noted that the Debtor had shown good faith by having made some payments on the loans, although the payments were never enough to reduce principal. She also found an additional basis for finding good faith in that the Debtor’s student loans were not the precipitating factor in the debtor’s decision to file bankruptcy. Rather, the Debtor had been saddled with an $8,000 judgment in favor of a former landlord who was garnishing his wages.

Judge Whipple found, therefore, that the Debtor met the second and third parts of the Brunner test, requiring a showing of a good faith attempt to repay the student loans and a demonstration that his circumstances were likely to persist.

In Re Pierson  is just one more example of how America’s bankruptcy judges are continuing to rebuke lender’s arguments and discharge student loan debts. 

[1] Pierson v. Educational Credit Management Corp. (In re Pierson), 17-3096 (Bankr. N.D. Ohio Oct. 4, 2018)

[2]  Barrett v. Educational Credit Management Corp., 487 F.3d 353 (6th Cir. 2007).

[3] Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).