The Fifth Circuit has released a new opinion which underscores just how hard it is to discharge a student loan under the undue hardship standard. Thomas v. Department of Education (In re Thomas), 931 F.3d 449 (5th Cir. 2019).
A Sympathetic Debtor
Vera Thomas wanted to improve her station in life. She was working at a call center in Southeastern Virginia earning $11.40 per hour with benefits. In 2012, she decided to enroll in a local community college. She took out two loans for $3,500.00 each for her first two semesters. She did not return for a third semester and her loans went into repayment. In spring of 2014, she paid back about $82 on her loans.
Here is what happened next as told by Judge Edith Jones:
Ms. Thomas's health began to decline significantly in 2014 when she was diagnosed with diabetic neuropathy. The condition, which often reduces circulation in patients' lower extremities, caused muscle weakness, numbness, and pain in her legs and feet after prolonged standing. Ms. Thomas frequently took unpaid leave from work at the call center to manage her symptoms and incurred significant medical expenses. In 2016, her employer was acquired by another company, and the new employer fired her for violating company policies. Because she was terminated for cause, Ms. Thomas was ineligible for unemployment benefits.
931 F.3d at 440. Ms. Thomas moved in with her then-boyfriend and held some jobs with Perfumania, Whataburger and UPS. She was not able to keep these jobs because they required her to be on her feet.
She filed Chapter 7 bankruptcy on March 24, 2017. At that time, she was 60 years old and survived on a combination of public assistance and private charity. She qualified for an in forma pauperis filing and was represented by Noah Schottenstein, an attorney with Baker Botts who represented her pro bono. She sued to have her student loans discharged as an undue hardship. Her case was heard by the well-regarded Judge Harland D. "Cooter" Hale. Unfortunately, Judge Hale found that she did not qualify for an undue hardship. She appealed to the District Court which affirmed.
At the Fifth Circuit, Ms. Thomas continued to be represented by pro bono attorneys Tatiana Sainati with Wiley Rein in Washington D.C. and Stephanie Barnes with Siebman Forrest in Plano. Ms. Thomas had amicus support from Tara Twomey representing the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys. With all this legal firepower on her side, surely Ms. Thomas would prevail at the Fifth Circuit level, right? Unfortunately, the Brunner test was too much for her.
The Fifth Circuit's Ruling
Under 11 U.S.C. Sec. 523(a)(8), student loans are non-dischargeable unless the debtor can show that not discharging them would impose an undue hardship on the debtor and dependents. The Fifth Circuit, along with most circuits other than the Eighth (more on that later), follows the Brunner test. Brunner requires the debtor to 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.
931 F.3d at 451.
Judge Hale found--and the Fifth Circuit agreed--that Ms. Thomas satisfied the first prong. Her income of $194 per month and expenses of $640 per month did not allow her to pay her student loans. However, Judge Hale found--and the Fifth Circuit agreed--that she did not meet the second prong of the test. The Fifth Circuit explained that
the exceptionally demanding second prong of Brunner requires more than a showing of dire financial straits because the debtor must show that circumstances out of her control have resulted in a "total incapacity" to repay the debt now and in the future.
Id. The Court found that the debtor did not meet this standard.
The answer to this question must be negative. Ms. Thomas's argument that she meets the second Brunner prong is contradicted by the record. Foremost, she is, by her own admission, capable of employment in sedentary work environments. Second, her actual employment experience demonstrates that after losing the call center job, she was hired by three different employers, although she quit when they were unable to accommodate her need to remain sedentary for periods of time during her shifts. Finally, she lost her job at the call center not because of physical problems beyond her control but for a violation of company policies.In sum, there is no evidence that Ms. Thomas's present circumstances, difficult as they are, are likely to persist throughout a significant portion of the loans' repayment period. Under the standard adopted by this court and the vast majority of other circuit courts, Ms. Thomas is not eligible for a discharge of her student loans.
931 F.3d at 452-53. This ruling seems rather callous. Ms. Thomas suffers from a medical condition. She has been unable to hold a job. However, maybe, somehow, this will change in the future and allow her to pay the loans. In the words of The Princess Bride,
“Life isn't fair, it's just fairer than death, that's all.”
One of the interesting aspects of the opinion was that the Fifth Circuit noted that Bankruptcy Judge Hale, who tried the case, stated that in fifteen years on the bench, he had never discharged a student loan over the objection of the lender. Judge Hale is not an unfair judge so that got me wondering whether anyone who is not in a coma can meet the test. I did a LEXIS search for cases decided between 2017-2019 which directly ruled on the undue hardship standard. I found seventy decisions. The debtor completely prevailed in eleven cases, received a partial discharge in six cases and lost in fifty-three cases. Thus, the debtor's chance of receiving at least partial relief was 24% which is more than 0%.
So who are the debtors who received undue hardship discharges? In one case, a debtor who had never earned enough to make payments on her student loans was diagnosed with Bipolar Type I disorder with psychotic features and post-traumatic stress disorder. Understandably, she was not able to work and her sole source of income was SSDI. Hill v. Educ. Credit Mgmt. Corp. (In re Hill), 598 B.R. 907 (Bankr. N.D. Ga. (2019). My biggest question about this case is why the lender could oppose the discharge with a straight face. Another debtor succeeded in getting an undue hardship discharge where he had suffered from a bi-polar manic depressive disorder for over 20 years and his illness made it hard for him to read and write. Pierson v. Navient (In re Pearson), 2018 Bankr. LEXIS 3106 (Bankr. N.D. Ohio 2018). Finally, a hardship discharge would be granted where a debtor's payment under an Income Based Repayment plan ("IBR") would be $0 and the debtor would be taxed on the forgiven debt at the conclusion of the IBR. Murphy v. United States (In re Murphy), 2018 Bankr. LEXIS 1598 (Bankr. D. N.M. 2018).
On the other hand, there are cases where debtors receive a hardship discharge despite the fact that they look very similar to debtors who were denied one. Educational Credit Management Corp. v. Murray (In re Murray), 2017 U.S. Dist. LEXIS 155043 (D. Kan. 2017) is a case where the District Court affirmed a Bankruptcy Court's ruling allowing an undue hardship discharge. The Debtors had disposable income of $1,658 per month and testified that they could afford to pay between $200-$500 per month on their student loans. The debtors were in their 40s and were "potentially settled into the jobs they will hold for the rest of their careers." To fully pay off their student loans would require payments of $2,614-$3,945 per month, sums which exceeded their disposable income. They could also have entered into an IBR which would require them to pay $605-$907 per month and would leave them with a tax bill at the end of twenty-five years. However, the record does not show that the debtors established that they could not potentially win the lottery or be adopted by Oprah. Therefore, the mere fact that it was implausible that they would ever be able to pay off their student loans didn't mean that it was impossible.
Totality of the Circumstances
There is one more twist. The Eighth Circuit follows what is known as the "totality of the circumstances" test. Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702 (8th Cir. 1981). On its face, totality of the circumstances looks similar to Brunner:
Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider: (1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. (citation omitted). Simply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt-while still allowing for a minimal standard of living-then the debt should not be discharged. Certainly, this determination will require a special consideration of the debtor's present employment and financial situation-including assets, expenses, and earnings-along with the prospect of future changes-positive or adverse-in the debtor's financial position.
However, at least in my limited survey, totality of the circumstances vs. Brunner, makes a big difference in result. When I looked at totality of the circumstances separate from other cases, there were five cases where relief was granted and five where it was denied, a 50% success ratio. Looking only at the Brunner-based cases, there were six complete discharges, six partial discharges and 48 cases where no relief was granted, representing a 20% chance of partial or complete discharge.
My examination of seventy cases is by no means definitive. However, it strongly suggests that debtors are not fighting on a level playing field depending on whether they file in the Eighth Circuit or the rest of the country. This is a promising research subject for a younger Warren & Westbrook.
Concluding Rant
Section 523(a)(8) is broken. A debtor should not have to demonstrate psychosis to discharge a student loan. It seems absurd to me that a court could conclude that a 60 year old woman with diabetic neuropathy presently earning $194 per month would somehow be able to pay her student loans some day. Inconceivable! It also seems blatantly unfair to me that a debtor's chance of discharging a student loan varies dramatically depending on where a case is filed. That seems to violate the Constitution's requirement that we have uniform bankruptcy laws.
I see two ways out of this dilemma. One is that the Supreme Court could resolve the split in circuits. I do not have great confidence that the current court will do so in a way that helps people discharge their student loan debts. The second is that Congress can get us out of this mess. Congress dropped "undue hardship" into the Code without telling us what they meant. At the time, undue hardship was one of two ways to discharge a student loan so that if someone couldn't meet a difficult undue hardship standard they could still receive a time-based discharge. The current bills pending in Congress would repeal Section 523(a)(8) altogether. That is not realistic. What we need is a bill narrowly targeting undue hardship discharges.
Post-Script
Although the attorneys in the Thomas case were not successful, they deserve our thanks. Pro bono and amicus curiae attorneys are valuable friends of the law.
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