Twenty-seven years ago the Second Circuit was faced with a debtor who proposed to use the Bankruptcy Code to avoid her student loan debt – only five months after graduation. The Second Circuit came down harshly on Ms. Brunner and established an “undue hardship” test, which few debtors have passed since the decision in the Brunner case. Eleven of the federal circuit courts, including the Eleventh Circuit, have adopted the Brunner “undue hardship” test, and there have been few significant challenges to the standard over the nearly three decades of its existence.
Since Brunner was decided, however, the Bankruptcy Code has changed significantly and the nation’s student loan debt has risen at an astonishing rate. In 1987, educational debt was approximately $42 billion. Fast forward twenty-seven years later, and there is nearly $1 trillion in outstanding educational debt – an increase of 2281%. This dramatic increase has led some commentators to argue that Brunner is outdated, and changes need to be made to bankruptcy courts’ approach to student loan forgiveness.
Recently, a decision out of the Ninth Circuit, In re Roth, addressed the continuing legacy of Brunner. In a concurring opinion, Judge Pappas of the Bankruptcy Appellate Panel for the Ninth Circuit urged the Ninth Circuit to reconsider the use of the Brunner test to determine what constitutes an “undue hardship,” which debtors must prove in order to have their loans discharged. Specifically, Judge Pappas noted that while the pool of student loan debts that are excepted from discharge has increased, the possibility for obtaining a discharge of the such debts has become more difficult.
Judge Pappas’ concurring opinion represents a significant minority of judges, who have faced Brunner over the last quarter century. Nevertheless, it is important for lenders to understand that given the sharp rise in outstanding educational debt, and the current federally proposed measures to ease such debt, Judge Pappas’ opinion may represent a shift in the zeitgeist of student debt forgiveness in the bankruptcy context.
Whether the concurring opinion in Roth demonstrates a trend remains to be seen. Unquestionably, the Brunner test, as applied to bad apples like Ms. Brunner, herself, was appropriate at the time her case was decided. Like Dewsnup in the lien stripping context, Brunner remains good law, despite certain courts’ leanings towards sympathetic debtors after the most recent economic downturn.
Student loan lenders should pay careful attention to Roth and other educational debt cases which may wend their way to the circuit or Supreme Court level. Thus far, no appellate court has tried to avoid the Brunner test, as the Eleventh Circuit did with the Dewsnup standard in McNeal, but according to certain commentators and Judge Pappas, a challenge to Brunner is ripe.