In re Brunner, 83 Civ. 4588-CSH.

• Decision Date: 21 February 1985
• Docket Number: No. 83 Civ. 4588-CSH.,83 Civ. 4588-CSH.
• Citation: 46 BR 752
• Parties: In re Marie BRUNNER, Debtor. Marie BRUNNER, Plaintiff-Appellee, v. NEW YORK STATE HIGHER EDUCATION SERVICES CORPORATION, Defendant-Appellant.
• Court: U.S. District Court — Southern District of New York

46 B.R. 752 (1985)

In re Marie BRUNNER, Debtor.

Marie BRUNNER, Plaintiff-Appellee, v. NEW YORK STATE HIGHER EDUCATION SERVICES CORPORATION, Defendant-Appellant.

No. 83 Civ. 4588-CSH.

United States District Court, S.D. New York.

February 21, 1985.

Marie Brunner, pro se.

Barbara C. North, Albany, N.Y., for defendant-appellant.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

This is an appeal from an April 12, 1983 oral decision of Hon. Howard Schwartzberg, Bankruptcy Judge, discharging appellee Marie Brunner's student loans pursuant to 11 U.S.C. § 523(a)(8)(B). Section 523(a)(8)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(8)(A), declares such loans nondischargeable for five years after they first come due, but § 523(a)(8)(B) creates an exception to the general rule if the failure to discharge would "impose an undue hardship on the debtor and the debtor's dependents." Judge Schwartzberg found such undue hardship and discharged appellee's student loans. Appellant New York State Higher Education Services Corp. ("HESC"), guarantor of the loans, contends that this was error.

Appellee received a Bachelor of Arts degree in 1979 and a Master's degree in Social Work in May, 1982. Approximately seven months after receiving her Master's degree appellee filed for personal bankruptcy, and her outstanding debts, exclusive of approximately $9,000 in student loans, were discharged. Two months later, upon expiration of the nine month grace period suspending repayment of the student loans incurred during her undergraduate and graduate education, appellee filed this adversary action seeking discharge of her accumulated student loans. Following a brief oral hearing at which appellee described her shaky finances and her unsuccessful efforts to find work following her graduation, Judge Schwartzberg issued a decision from the bench discharging the loans. HESC, which had assumed the loans from Anchor Savings Bank following appellee's default, takes this appeal from that finding. Appellee's counsel below has apparently deserted her, for no responsive brief was filed on her behalf. It is assumed that she opposes the appeal.

I.

"Undue hardship" is undefined in the Bankruptcy Code. The existence of the adjective "undue" indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans, but the statute otherwise gives no hint of the phrase's intended meaning. The question has produced a daunting proliferation of decisions in the Bankruptcy Courts, but there is little appellate authority.¹ The statutory history has thus provided the lodestone for most interpretations.

Congress itself had little to say on the subject. The initial House bill deleted any reference to student loans, while the Senate bill included language similar to that present in the final bill. See H.R. 8200, 95th Cong., 1st Sess. (1977), reprinted in Collier on Bankruptcy, Appendix 3 (15th Ed.1979), at III-1 (hereafter "Collier"); S. 2266, 95th Cong., 2d Sess. (1978), reprinted in Collier, supra, Appendix 3, at VII-1, 417. The Senate Report which accompanied the bill, however, is mute on the issue of undue hardship, noting merely that the bill "follows generally current law and excepts from discharge student loans until such loans have been due and owing for five years." The final compromise bill accepted the Senate's language, but the report of the compromise committee—printed only as the remarks of the two Congressional sponsors of the bill—again ignores undue hardship. See, e.g., 124 Cong.Rec.H. 11096, 95th Cong., 2d Sess. (daily ed. Sept. 28, 1978), reprinted in Collier, supra, Appendix 3, at IX-101.

The phrase "undue hardship" was lifted verbatim from the draft bill proposed by the Commission on the Bankruptcy Laws of the United States ("the Commission"). The Commission's report provides some inkling of its intent in creating the exception, intent which in the absence of any contrary indication courts have imputed to Congress. The Commission noted the reason for the Code provision: a "rising incidence of consumer bankruptcies of former students motivated primarily to avoid payment of educational loan debts." Report of the Commission on the Bankruptcy Laws of the United States, House Doc. No. 93-137, Pt. I, 93d Cong., 1st Sess. (1973) at 140 n. 14, reprinted in Collier, supra, Appendix 2, at PI-i. This "rising incidence" contravened the general policy that "a loan . . . that enables a person to earn substantially greater income over his working life should not as a matter of policy be dischargeable before he has demonstrated that for any reason he is unable to earn sufficient income to maintain himself and his dependents and to repay the educational debt." Id. at 140, n. 15. The Commission implemented this policy by delaying dischargeability for five years, a time period which, it was anticipated, "gives the debtor an opportunity to try to meet his payment obligation." After five years, the exception is lifted in recognition of the fact that "in some circumstances the debtor, because of factors beyond his reasonable control, may be unable to earn an income adequate both to meet the living costs of himself and his dependents and to make the educational debt payments." Id. at 140, n. 16. As a calculation of "undue hardship," the Commission envisioned a determination of whether the amount and reliability of income and other wealth which the debtor could reasonably be expected to receive in the future could maintain the debtor and his or her dependents at a minimal standard of living as well as pay off the student loans. Id. at 140-41, n. 17.

Most courts have accepted that a debtor must at least satisfy the "minimal standard of living" test before a discharge of his or her student loans will be granted. See, e.g., In re Johnson, 5 B.C.D. 532, 537 (Bankr.E.D.Pa.1979); In re Andrews, 661 F.2d 702, 704 (8th Cir.1981). That is, before receiving a discharge of student loans the debtor is required to demonstrate that, given his or her current income and expenses, the necessity of making the monthly loan payment will cause his or her standard of living to fall below a "minimal" level. Indeed, if the calculation of future earnings and expenses were an exact science, a similar showing extended into the future might be all that would be necessary to justify discharge. After all, it is not unreasonable to hold that committing the debtor to a life of poverty for the term of the loan—generally ten years—imposes "undue" hardship.

Predicting the future, however, is never so easy. Minimum necessary future expenses may be ascertained with some precision from an extrapolation of present needs, but unpredictable changes in circumstances such as illness, marriage, or childbirth may quickly wreak havoc with such a budget. Even more problematic is the calculation of future income. It is the nature of § 523(a)(8)(B) applications that they are made by individuals who have only recently ended their education. Their earning potential is substantially untested, and because they are inexperienced they are in all likelihood at the nadir of their earning power. They may, like appellee, have had difficulty in securing employment immediately after graduation. Extrapolation of their current earnings is likely to underestimate substantially their earning power over the whole term of loan repayment.

It is no doubt for this reason that many courts have required more than a showing on the basis of current finances that loan repayment will be difficult or impossible. Perhaps the best articulation of this doctrine is that of Judge Lifland of the Bankruptcy Court of this district, who wrote that "dischargeability of student loans should be based upon the certainty of hopelessness, not simply a present inability to fulfill financial commitment." In re Briscoe, 16 B.R. 128, 131 (Bankr.S.D.N.Y. 1981).² Stated otherwise, the debtor has been required to demonstrate not only a current inability to pay but additional circumstances which strongly suggest that the current inability to pay will extend for a significant portion of the repayment period of the loan.

In addition to Judge Lifland's language, this test has been formulated as the necessity of showing of "unique" or "exceptional" circumstances. See, e.g., In re Densmore, 8 B.R. 308, 309 (Bankr.N.D.Ga.1979); In re Rappaport, 16 B.R. 615, 617 (Bankr. D.N.J.1981). Such circumstances have been found most frequently as a result of illness, e.g., In re Norman, 25 B.R. 545, 550 (Bankr.S.D.Cal.1982), a lack of usable job skills, e.g., In re Seibert, 10 B.R. 704 (Bankr.S.D.Ohio 1981), the existence of a large number of dependents, In re Clay, 12 B.R. 251 (Bankr.N.D.Iowa 1981), or a combination of these. In re Diaz, 5 B.R. 253 (Bankr.W.D.N.Y.1980); Shoberg v. Minnesota Higher Education Coordinating Council, 41 B.R. 684, 687 (Bankr.D.Minn. 1984); In re Dresser, 33 B.R. 63 (Bankr.D. Me.1983).

Some courts, following the lead of In re Johnson, supra, 5 B.C.D. at 740, have required a showing of "good faith" prior to discharge. There is no specific authority for this requirement, but the need for some showing of this type may be inferred from comments of the Commission report. In discussing the discharge of loans after five years, when a showing of undue hardship is no longer required, the Commission noted that such discharge is fair because the debtor may be unable to repay his or her debts due to "factors beyond his reasonable control." Report, supra, at 140 n. 16. If external circumstances were seen as justifying discharge after five years, it is likely that only such circumstances should be permitted to justify discharge prior to that time. The propriety of a requirement of good faith is further emphasized by the stated purpose for § 523(a)(8): to forestall students, who frequently have a large excess of liabilities over assets solely because of their student loans, from abusing the bankruptcy system to...