600 B.R. 51
Bankr. S.D. Ind.2019Background
- Debtors (DC and Brenda), married, no dependents, both in their late 50s, attended college later in life and have associate degrees; both work full time and earn roughly $19/hr each.
- They hold federal and private student loans; defendant (loan holder/servicer) opposes discharge under 11 U.S.C. § 523(a)(8).
- Plaintiffs previously participated in income-based repayment (IBR/REPAYE) options but stopped payments after filing; schedules show modest monthly surplus even when projected IBR/navient payments are included.
- Plaintiffs argue loans cause undue hardship, noting age, long repayment horizon, and potential tax liability on future loan forgiveness under IBR/REPAYE.
- Court applies the Seventh Circuit’s adoption of the Brunner three-prong test (in Roberson) and finds plaintiffs failed to prove any of the three prongs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 523(a)(8) student loans are dischargeable for undue hardship (Brunner test governs) | Debtors: loans impose undue hardship and Brunner excuse applies | Lender: Brunner controls; plaintiffs must prove all three prongs by preponderance | Court: Brunner applies; plaintiffs bear burden and failed to meet it |
| First prong — inability to maintain a minimal standard of living if forced to repay | Repayment (contractual or after IBR interest accrual) would force minimal/insufficient living; current payments and accruing interest make repayment untenable | Plaintiffs have budget surplus, can enroll in REPAYE/IBR and still maintain minimal standard by cutting discretionary spending | Court: Plaintiffs can maintain a minimal standard of living while repaying under IBR/REPAYE; first prong not met |
| Second prong — additional circumstances indicating inability will persist | Age and long repayment horizon make inability likely to persist; REPAYE may not reduce principal | Defendant: Plaintiffs’ incomes are stable and may improve (DC apprenticeship), so hopelessness not certain | Court: Financial outlook not a ‘‘certainty of hopelessness’’; second prong not met |
| Third prong — good faith effort to repay | Plaintiffs: (implicitly) sought relief and relied on IBR options; hardship justifies discharge | Defendant: Plaintiffs failed to maximize income/minimize expenses and ceased IBR payments; insufficient past repayment efforts | Court: Plaintiffs did not show good faith (stopped IBR payments, discretionary spending, retirement contributions); third prong not met; no discharge |
Key Cases Cited
- Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) (articulates three-prong undue hardship test)
- Roberson v. City of Aurora (In re Roberson), 999 F.2d 1132 (7th Cir. 1993) (Seventh Circuit adopts Brunner test)
- Goulet v. Educ. Credit Mgmt. Corp., 284 F.3d 773 (7th Cir. 2002) (debtor bears burden to prove each Brunner element by preponderance)
- Krieger v. Fed. Nat’l Mortg. Ass’n (In re Krieger), 713 F.3d 882 (7th Cir. 2013) (good-faith inquiry focuses on past repayment efforts)
- Tetzlaff (In re Tetzlaff), 794 F.3d 756 (7th Cir. 2015) (improvement potential defeats second-prong hopelessness)
- Grogan v. Garner, 498 U.S. 279 (1991) (standard of proof in bankruptcy dischargeability matters)
- Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009) (insolvency exception to taxable cancellation income when loan forgiveness occurs)