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Maryland Court Discharges Student Debt

As we reported, on June 21, 2021, the U.S. Supreme Court declined to revisit the rigid Brunner standard for determining “undue hardship” capable of discharging student debt.  The same day, United States Bankruptcy Judge Michelle M. Harner applied the Brunner standard, discharging $178,000 of student debt.

Judge Harner explained that “[a]lthough the Bankruptcy Code[] reflects Congressional intent to provide debtors with as broad of a discharge as possible, Congress has expressly excepted [student loan] debt from the bankruptcy discharge.”  In re: Terry Lucille Randall, 19-21815, 2021 WL 2550034, at *1 (Bankr. D. Md. June 21, 2021) (“In re Randall”).  But, the Bankruptcy Code includes an exception to the student-loan exception, where failing to relieve such debt “would impose an undue hardship on the debtor and the debtor’s dependents.”  11 U.S.C. § 523(a)(8).

Congress left “undue hardship” undefined, but most courts “have adopted the test developed by the Second Circuit . . . commonly referred to as the Brunner test.”  In re Randall at *5 (citing Brunner v. N.Y. Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir.1987)).  The Brunner test requires debtors to show:

(1) They cannot maintain, based on current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay the loans;

(2) Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period for the student loans; and

(3) They have made good faith efforts to repay the loans.

Id.  Judge Harner found each of these requirements satisfied. 

As to the “minimal” standard of living, the parties disputed (1) whether the petitioner/plaintiff (the “Plaintiff”) had money left over after monthly expenses and (2)  whether the Petitioner could reduce expenses by moving into a cheaper apartment.  Judge Harner rejected defendant Navient Solutions (the “Defendant”) position that the Plaintiff had money to spare.  The Plaintiff reported surplus income, but it depended on her working 40-100 hours of overtime per pay period.  As to a cheaper apartment, Judge Harner credited the Plaintiff’s testimony that she was fearful of moving into Baltimore City, and that apartments outside the city were more expensive than her current home.  Id. at *6-7 (“This Court is not willing to require a debtor to move into unsafe or substandard living conditions just to repay a student loan debt.”). 

With respect to the second Brunner element—indications that the state of affairs is likely to persist—the court cited, inter alia, (1) Plaintiff’s advanced age (68) and (2)  that her overtime hours were likely to decrease after the COVID-19 pandemic concluded.  “The [c]ourt also observ[ed] that requiring an individual at age 68 to continue to work 80 plus hours per week for a significant period of time (or even assuming that she could do so) is unreasonable.”  Id. at *8. 

Finally, with respect to good faith efforts to repay the loans, the Plaintiff had only repaid $3,764.43 of the $190,000 owed to the Defendant (which only represented a portion of Plaintiff’s $500,000 of student loan debt).  Nonetheless, as the Plaintiff had “made some payments on her student loan debt, did not ignore those debts completely, and appears to have managed her financial affairs to the best of her ability,” the court found that “within her limits, [the Plaintiff] made good faith attempts to repay or otherwise address her student loan debt.”  Id. at *9. 

Thus, the court found that “requiring the Plaintiff to repay the Defendant in full would impose an undue hardship on the Plaintiff. . . .  That said, the [court could] not ignore that the Plaintiff ha[d] some ability to repay some portion of her student loan debt.”  Id. at *10.  To determine the amount, the court reevaluated the same factors demonstrating undue hardship, including current income, potential changes in income, and expenses.  Id. at 11.  “Balancing all of the evidence and considering the language and purpose of the [Bankruptcy] Code, the [c]ourt determine[d] that the Plaintiff should be required to pay a total of $12,000 (plus interest at the federal judgment rate).”  Id.

In so holding, the court rejected precedent “that any ability to repay requires a complete denial of discharge.”  Id. at *10.  Instead, Judge Harner found that to effectuate Congressional intent, 11 U.S.C. § 523(a)(8) should be read to permit a partial discharge of student debt.  Id.  Other courts have taken the opposite approach.  Id. at *10 & n.22 (discussing precedent).  Unfortunately, the Supreme Court recently declined to resolve the conflict between that rigid standard, the slightly more flexible approach applied by Judge Harner (permitting partial discharge), and the unrestrictive “totality of the circumstances” test endorsed by the Eighth Circuit.  See In re Long, 322 F.3d 549, 554 (8th Cir. 2003) (rejecting Brunner).