Julia Merani
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Generally, student loan debt will not be discharged in a case under title 11 of the United States Code (the “Bankruptcy Code”) unless there is a showing of “undue hardship on the debtor and debtor’s dependents . . . .” as provided by section 523(a)(8).[1] In Hull v. United States Dep’t of Educ., a bankruptcy court in Kentucky held that student loans will not be discharged when the debtor earns “well above the poverty level,” when the debtor’s circumstances “are not likely to persist,” and when the debtor has not made any good faith effort to repay the loans.[2] Ona Colette Anne Hull incurred student loan debt totaling approximately $144,000 to fund her education, and had not made payment to her student loans in approximately 7 years.[3] Between 2010 to 2017, her average annual wages totaled approximately $63,000.”[4] In July of 2018, the debtor filed for relief under Chapter 7 of the Bankruptcy Code, and in October 2018, the debtor received a general Chapter 7 discharge.[5] In an attempt to discharge her student loan debts, she also filed a complaint against, among others, the United States of America (collectively, the “Defendants”), seeking a discharge under section 523(a)(8).[6] The Defendants filed a Joint Motion for Summary Judgment, arguing that the debtor has not met her burden under the undue hardship standard.[7] The debtor disagreed and filed a cross motion for Summary Judgment.[8]
The Kentucky bankruptcy court adopted the “Brunner test” established by the Court of Appeals for the Second Circuit in Brunner v. N.Y. State Higher Educ. Serv., 831 F.2d 395 (2d Cir. 1987) (the “Brunner” test).[9] To satisfy the test, a debtor must prove:
(1) that 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 loans; (2) that 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) that the debtor has made good faith efforts to repay the loans.[10]
All three of the elements must be satisfied for the discharge of the student loan debts to be granted.[11]
Here, according to the Kentucky bankruptcy court, the debtor failed to meet all three elements of the Brunner test, and thus repaying her student loans would not constitute an undue hardship.[12] First, the debtor could maintain a minimal standard of living, in fact, the debtor has earned well above the poverty level for Kentucky.[13] Further, the debtor spent funds on “luxury items”.[14] Thus, the debtor failed to satisfy the first element of the Brunner test.[15] Next, the second element was not met because the debtor agreed in her own deposition that “her financial situation should improve in the future.”[16] The court did not find a “certainty of hopelessness” in the debtor because she earned a high yearly income and she spends large amounts of money on trips and gifts, thus there should have been some level of payment made on her student loans.[17] Finally, the debtor did not satisfy the third element of the Brunner test in that the debtor failed to “demonstrate a good faith effort to repay her student loans.”[18] Although the debtor maintained consistent employment, she made no effort to save for the repayment of the loans, she made no attempt to apply to repayment programs, and she offered no explanation as to why she has not made a payment on the loan for seven years.[19]
The Brunner test is still good law in Kentucky, even though the test has been “abandoned by a number of courts in several different circuits”.[20] Thus, student loans will not be discharged in a Chapter 7 bankruptcy case in a Kentucky Court, if the court concludes that a debtor could maintain a minimal standard of living, her circumstances are likely to improve, and the debtor made no good faith effort to repay the loans.[21]
[1] Hull v. United States Dep’t of Educ. (In re Hull), No. 18-3046, 2021 WL 1602880, at *4 (Bankr. W.D. KY. Apr. 23, 2021) (citing 11 U.S.C. §523(a)(8)).
[2] Id. at 5–6.
[3] Id. at 2–3.
[4] Id. at 2 (stating the debtor received approximately $1,933.99 every two weeks from her job, and she also received $312 per month in child support, which constituted her earning more than “three (3) times the annual poverty guidelines.”).
[5] Id. at 3.
[6] Id. (citing 11 U.S.C. §523(a)(8)).
[7] Id. at 3, 8.
[8] Id. at 1, 3 (noting the joint Defendants in this case are the Department of Education, Education Credit Management Corporation, and Kentucky Higher Education Assistance Authority, which are represented by the United States of America).
[9] Id. at 4; Brunner v. N.Y. State Higher Educ. Serv., 831 F.2d 395 (2d Cir. 1987).
[10] Id. (citations omitted).
[11] Id. (holding even if one of the elements from the Brunner test is not met there is no dischargeability) (citing In re Faish, 72 F.3d 298, 306 (3rd Cir. 1995)).
[12] See id. at 8.
[13] See id. at 5 (“[T]he Plaintiff’s income is much higher than debtors who normally seek to discharge student loan debt.”).
[14] See id. (explaining luxury items include large amounts of money spent on birthdays and holidays, deductions for a 401(k), and trips).
[15] Id. at 6 (holding that since she fails the first element of the Brunner test, the court could stop the analysis here, but continues to apply the second and third element).
[16] Id. (“When asked during her January 2020 deposition whether her financial situation should improve in the future, Plaintiff agreed that ‘[i]t should.”).
[17] Id. (holding “the Court cannot find a certainty of hopelessness in either her current circumstances or her future prospects to satisfy the second factor required by Brunner.”).
[18] Id. at 7 (explaining good faith “is essentially an inquiry into whether the debtor has consciously or irresponsibly disregarded his or her repayment obligation—or, instead, whether there is some justification for the debtor’s default and ongoing inability to repay the loan.”) (citations omitted).
[19] See id. (noting if one does not even apply to the repayment programs, that can be indication of lack of good faith).
[20] Id. at 8.
[21] See id. at 5–8 (holding the debtor would not get her student loan debts discharged even under the “totality-of-the circumstances” test).