Friday, June 02, 2006

Interesting Opinion on Dischargeability of Student Loans

Judge Larry Kelly of the Western District of Texas has just written an opinion on dischargeability of student loans. This is must reading for anyone trying a case under Sec. 523(a)(8) because it is very comprehensive. A few interesting points.

Burden of Proof:

The conventional wisdom has been that the Debtor has the burden of proof on all issues in a student loan discharge case. However, in Ford v. Texas Higher Education Coordinating Board, Judge Kelly held that it is the creditor’s burden to prove (1) the existence of a debt (2) made for an educational loan and (3) made, insured or guaranteed by a governmental unit or made under any program funded in whole or in party by a governmental unit or nonprofit institution. If the creditor meets its burden, then the debtor must prove that excepting the debt from discharge will impose an undue hardship. This poses an interesting conundrum. What happens if neither side offers any evidence? Does it mean that the debtor automatically wins, since the creditor did not meet its burden? I think that Judge Kelly has it right. There are two different ways that a student loan might be dischargeable. The first is if one of the elements of non-dischargeability is not present. For example, if the debtor ran up a big tab to Starbucks for coffee which enabled her to study, his would arguably an educational loan (or at least a loan for educational purposes). However, since it was not made, insured or guaranteed by a governmental unit or non-profit it does not meet the first test. The second way for it to be dischargeable would be if undue hardship was shown. This raises a pleading issue. If the debtor alleges that the first part of the test is met, then the debtor would be judicially estopped from denying that the creditor had met its burden. However, if the debtor disputes it in a clear case, debtor’s counsel may violate Rule 9011.

The Bruner Test

Judge Kelly found that Bruner v. New York Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987) applies. Several years ago in In re Speer, 272 B.R. 186 (Bankr. W.D. Tex. 2001) Judge Monroe had questioned whether Bruner was good law in the Fifth Circuit. Since that time, the Fifth Circuit has adopted Bruner, which is a shame because it imposes a very high standard. The Fifth Circuit opinion is In re Gerhardt, 348 F.3d 89 (5th Cir. 2003).

Applying Bruner

Bruner has three prongs: (1) that the debtor cannot maintain a minimal lifestyle 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 and (3) that the debtor has made good faith efforts to repay the loans.

In this case, the Debtor ran up $250,000 in loans attending Texas Lutheran College (my alma mater) and St. Mary’s Law School. Apparently St. Mary’s is very expensive. Unfortunately, she was not able to pass the bar. She worked at a series of progressively better jobs but capped out at $45,000.

Judge Kelly found that the third prong was satisfied despite the fact that the debtor had never made a payment and had not applied to the Ford Federal Direct Loan Program. The court found that it is not bad faith to fail to make payments if you don’t have any money to make them with. Further, the debtor had explored avenues to receive help from elected officials and charitable organizations.

However, Judge Kelly found that the second prong was not present. According to the Fifth Circuit, this prong requires proof that the debtor has a total incapacity in the future to pay his debts for reasons not within his control. The additional factors that the Fifth Circuit said could apply would be psychiatric problems, lack of usable job skills and severely limited education. It would appear that some of these factors were arguably present. The debtor had gotten depressed and attempted suicide in 2002 and she was not able to use her education for its intended purpose. However, the pro se plaintiff showed herself to be highly educated and well-spoken; she presented her claims in an organized manner with supporting documentation and made a good presentation of her position. Normally, this would be high praise. However, here it spelled defeat when combined with her continuous employment.

The message here is that Bruner requires something much more than persistent inability to pay. To paraphrase the old Saturday Night Live sketch, the person has to end up living in a van down by the river (which was very close to the facts in Judge Monroe’s Speer case).

Because the Court found that the second prong was not satisfied, it never reached the first prong.


At trial, the Debtor tried to argue that Sec. 523(a)(8) was unconstitutional. If you are going to make this request, be sure to include it in your pleadings and also be sure to join the Attorney General of the United States as a party. Trying to make a trial amendment on a constitutional issue is not a good idea and was not successful here.

The judgment in this case is located at However, to get the opinion, you will need to go on to PACER at (PACER registration required).

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