Hedlund v. EDUCATIONAL RESOURCES INSTITUTE, INC.
468 B.R. 901
D. Or.2012Background
- Hedlund, educated with a J.D., filed for Chapter 7 bankruptcy and sought discharge of government-insured student loans; he had $85,245.87 in Stafford loans; he worked as a juvenile counselor and faced limited prospects for increasing income; he failed the bar exam twice and did not retake it; he had a spouse with limited income and minimal assets; the bankruptcy court applied Brunner to determine undue hardship and discharged excess debt, which the district court reversed.
- Hedlund faced wage garnishments and limited ability to make full monthly payments; prior to bankruptcy he made only one partial payment and rejected some offers to consolidate or pursue income-based plans; PHEAA offered three 30-year repayment options and an ICRP; Hedlund had a $465 monthly surplus after adjustments but could not cover full debt.
- The Brunner test requires three elements: minimal standard of living, likely persistence of hardship, and good faith; the Ninth Circuit remand required fuller findings on these factors.
- The district court reviewed de novo the Brunner elements and whether Hedlund met them, considering Hedlund’s income potential, lack of assets, and possible increased expenses; the court ultimately reversed the bankruptcy court’s discharge based on its view of Hedlund’s good faith and circumstances.
- PHEAA argues Hedlund can increase income or reduce expenses, or take the bar exam or obtain additional work; Hedlund argues current circumstances persist and repayment would cause undue hardship; the court analyzes Brunner elements to determine outcome.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Hedlund meets Brunner’s minimal standard of living prong | Hedlund’s budget shows a surplus only of $465; living costs and potential adjustments render full payments unconscionable | Hedlund could reduce nonessential expenses and work more; minimal standard of living could be maintained with adjustments | Hedlund meets minimal standard of living prong with limited surplus and competing adjustments. |
| Whether Hedlund shows additional circumstances likely to persist | Hedlund has limited upward income potential and no clear path to significant improvement | Income could rise with bar admission and relocation; assets are limited | Court finds Hedlund has additional circumstances indicating persistence of hardship. |
| Whether Hedlund acted in good faith to repay the loans | Hedlund attempted to consolidate, negotiated plans, and offered a $5,000 payment; he also maximized income where possible | Hedlund did not maximize income sufficiently, did not pursue ICRP effectively, and did not engage enough in renegotiation | Court finds Hedlund failed to show good faith under Brunner. |
Key Cases Cited
- Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987) (establishes the three Brunner elements for undue hardship)
- Mason v. Educational Credit Mgmt. Corp. (In re Mason), 464 F.3d 878 (9th Cir. 2006) (limits on requiring maximization of income under Brunner)
- Educ. Credit Mgmt. Corp. v. Nys (In re Nys), 446 F.3d 938 (9th Cir. 2006) (clarifies the second Brunner prong and presumes income may rise)
- Rifino v. United States (In re Rifino), 245 F.3d 1083 (9th Cir. 2001) (discusses burden of proving undue hardship under Brunner)
- Birrane v. U.S. Dep’t of Educ. (In re Birrane), 287 B.R. 490 (9th Cir. B.A.P. 2002) (discusses good faith and repayment plan negotiation)
- Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168 (9th Cir. 2003) (discusses partial discharge under Brunner when prongs are met)