Brunner test unfair to student loan debtors of color, high court told
2021 BKRDBRF 0086
•
By Douglas Mentes
WESTLAW Bankruptcy Daily Briefing
•
February 23, 2021
(February 23, 2021) - The restrictive test used in most circuits for discharging student loans in bankruptcy disproportionately burdens low-income debtors, particularly people of color, a consumer group has told the U.S. Supreme Court.
The difficulty and expense of meeting the rigid Brunner test discourage people of color, who frequently enter college with less family wealth than their white counterparts, from seeking bankruptcy relief and make it harder to obtain a discharge when they do, the Center for Responsible Lending argues in a Feb. 3 amicus brief.
The group is supporting Thelma McCoy, a 62-year-old Texas resident who is seeking review of the 5th U.S. Circuit Court of Appeals' determination that she did not satisfy the test under Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), for discharging her student loan debt as an "undue hardship."
There is a persistent, long-standing circuit split on the proper test for "undue hardship" that has "expose[d] debtors to materially different law and outcomes between jurisdictions," the nonprofit, dedicated to consumer access to fair financial products, says in its brief.
The Brunner test's mandatory requirements impose a higher standard for discharge than required by the Bankruptcy Code, and "a number of courts, including the 5th Circuit, … have interpreted Brunner in draconian ways, demanding 'total incapacity' or a 'certainty of hopelessness' in repayment," the group says.
It argues for adoption of the "simpler, more flexible" totality-of-the-circumstances test, used in the 1st and 8th circuits, which "would help debtors with fewer resources, often borrowers of color, to obtain a 'fresh start.'"
Student loan discharge denied
McCoy entered college in her 40s, first obtaining a bachelor's degree, followed by a master's in 2006 and a Ph.D. in 2014, borrowing $175,000 to fund her education, according to court filings.
While pursuing her Ph.D., McCoy suffered significant injuries, and she has had difficulty finding work after graduation due to what she says are continuing disabilities.
McCoy filed for Chapter 7 relief in 2016 in the U.S. Bankruptcy Court for the Southern District of Texas, and she initiated an adversary proceeding against the U.S. Department of Education seeking to discharge her student loan debt, which had ballooned to $350,000.
The statute does not define "undue hardship" but most circuits, including the 5th Circuit, use the Brunner test.
The test requires debtors to meet all three of its requirements: that they could not maintain a minimal standard of living if forced to repay the loans, "additional circumstances exist" indicating that this state of affairs is likely to persist long-term, and they have made good-faith attempts at repayment.
The Bankruptcy Court concluded McCoy, then 60, did not meet the test's second prong, and that her student loans were therefore nondischargeable.
Both the U.S. District Court for the Southern District of Texas and the 5th Circuit affirmed.
The 5th Circuit found the "additional circumstances" required to satisfy the second prong were not present because McCoy's critical health issues occurred before she took out "the bulk of the loans," and her health issues "did not prevent her from obtaining her doctorate and various forms of employment."
Certiorari petition
McCoy filed a certiorari petition in January 2021, asking the Supreme Court to resolve the circuit split between the Brunner test and the totality-of-the-circumstances test.
William R. Corbett and Yvette G. Missri, representing the Center for Responsible Lending, argue that the differences "can be outcome-determinative and yield different rates of discharge," citing research showing a "much higher" student loan discharge rate in the 1st Circuit — a totality jurisdiction — than the 3rd Circuit, a Brunner jurisdiction.
"The 5th Circuit's jurisdiction [which includes Texas, Louisiana and Mississippi] covers states with large Black populations," the group explains, saying "[t]his context makes the strictness of the Brunner test burdensome to the Black borrowers who are disproportionately represented in the 5th Circuit … and suggests [they] face especially stringent legal scrutiny compared to their peers seeking similar relief in other, whiter, geographies."
The group argues that the undue-hardship issue is better addressed by the totality approach, which makes "individualized assessments that examine the debtor's specific life circumstances and experiences and [does] not put dispositive weight on any one factor."
The National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys, as well as the Consumer Bankruptcy and Student Loan Academics, have also filed amicus briefs supporting McCoy's certiorari petition.
The DOE's response is due April 5.
By Douglas Mentes
Related articles
Related Articles from Westlaw Bankruptcy Daily Briefing
A group of consumer bankruptcy academics is urging the U.S. Supreme Court to resolve a circuit split over the appropriate standard for discharging student loans, saying the test used in most circuits "undermines the purposes" of the federal student loan program.
Related articles