Sunday, October 11, 2015

Discharging Student Loans in Oregon Bankruptcy Courts - Part 2 of 5


This post discusses how to meet the first prong of the Brunner undue hardship test in Oregon bankruptcy courts.

This is the second post of a five-part Q&A series about discharging student loans in Oregon. The first post discussed the general rule that student loans can't be discharged in bankruptcy, reviewed which types of educational debts are subject to the general rule, and introduced the undue hardship exception under the Brunner three-prong test.

Q: How do I meet the first prong of the Brunner test?

A: You must prove that you can't maintain a minimal standard of living if you're required to repay your student loans.


The first Brunner prong is met only if a debtor (a person filing bankruptcy) cannot repay their student loans after maximizing their income and reducing their budget down to a minimal standard of living.

In Nascimento, the Ninth Circuit BAP ruled that the first Brunner prong requires more than a showing of tight finances. The first Brunner prong is satisfied only if it would be unconscionable to require a debtor to increase their income or reduce their expenses. In Pena, the Ninth Circuit determined that the first Brunner prong is satisfied if a debtor's expenses exceed their earnings, resulting in no monthly disposable income to repay their student loans.

Q: Can I save for retirement and still meet the first Brunner prong?

A: Possibly, depending on your age and circumstances.

In Craig, the Ninth Circuit ruled that 401(k) plan contributions may be allowed, depending on a debtor's age, income, target retirement date, existing retirement savings, and the needs of the debtor's dependents, among other factors.

Q: Can I take a vacation and still meet the first Brunner prong?

A: Potentially, so long as you travel on a budget.


In Jorgensen, the Ninth Circuit BAP allowed a debtor $50 in monthly travel expenses to visit family once a year. In Degroot, the Oregon district court allowed a debtor to vacation in Europe based on evidence that she used travel points and spent very little on incidentals.

However, in Birrane, a Ninth Circuit bankruptcy court reasoned that a debtor met the first Brunner prong, in part, because she "takes no vacations."

Q: Can I meet the first Brunner prong if my budget includes support to family members?

A: Yes, if the support is reasonable.

In Sequeira, the Oregon bankruptcy court allowed a debtor to financially support her elderly parent as part of her minimal standard of living because her parent reasonable relied on the debtor for support and the debtor did in fact provide her parent necessary financial support.

Q: Can I own or lease a new car and still meet the first Brunner prong?

A: Probably, so long as your new car is necessary, economical, and not a luxury brand.


In Jorgensen, the Ninth Circuit BAP allowed a debtor to make payments on a new car under the first Brunner prong because her old car was not reliable and her new car was an inexpensive subcompact with a warranty. In Hedlund, an Oregon bankruptcy court allowed a debtor to make payments on a new car as part of his minimal standard of living.

Q: Can my budget include entertainment expenses and still meet the first Brunner prong?

A: Yes, within reason.

In Hedlund, the Oregon district court allowed monthly expenses for cable, internet, cell phones, and a gym membership as part of a debtor's minimal standard of living. In Birrane, the Ninth Circuit BAP allowed monthly charitable contributions, dining out expenses, book club purchases, and gifts. In Rosen, the Oregon bankruptcy court allowed entertainment, clothing, child support, family law attorney fees, health insurance for children, and a DUI fine.

However, in Nascimento, the Ninth Circuit BAP ruled that a debtor did not meet the first Brunner prong because she failed to engage in appropriate "short-term belt-tightening". The debtor's monthly budget included $65 for a hairdresser, a $325 car payment, a $100 phone bill, a $120 new clothing budget, weekly $100 chiropractor appointments, and $400 in projected child support payments.

Q: Can my budget include new clothing expenses under the first Brunner prong?

A: Yes, if new clothes are reasonable under the circumstances.

In Jorgensen, the Ninth Circuit BAP allowed new clothes and dry cleaning expenses as within a debtor's minimal budget, reasoning that the debtor's clothing expense was a result of her fluctuating weight after cancer.

Q: Can I meet the first Brunner prong even though my budget includes medical expenses?

A: Yes.


In Jorgensen, the Ninth Circuit BAP allowed an $800 monthly expense resulting from documented health problems as within a debtor's minimal budget.

Q: Do I need to take on a roommate to meet the first Brunner prong?

A: Yes, if possible.

In Degroot, the Oregon district court ruled that a debtor failed to meet the first Brunner prong because she lived alone in a three bedroom house and failed to take on roommates for additional income. In Williams, the Ninth Circuit determined a debtor did not meet the first Brunner prong because he lived alone in a two bedroom apartment and failed to take on an additional roommate or downsize to a one bedroom apartment. 9 Fed. Appx. 696 (9th Cir. 2001).

Q: Can I establish the first Brunner prong even though my income fluctuates?

A: Yes.

In Mason, the Ninth Circuit affirmed the discretion of bankruptcy courts to determine the proper method to average a debtor's fluctuating income and expenses. In Pena, the Ninth Circuit did not disrupt a bankruptcy court's decision to average the debtors' expenses incurred at the time of filing, during discovery, and at the time of trial.

Q: Can I meet the first Brunner prong if my income is above the poverty guidelines?

A: Yes.


In Howe, the Ninth Circuit BAP ruled that the first prong of the Brunner test requires analysis of a debtor's actual monthly budgets, regardless of whether their income meets or exceeds the federal poverty guidelines or IRS non-collectability standards. In Carter, the Ninth Circuit BAP determined that a debtor who worked at a gas station did not pass the first Brunner prong because despite his low earnings, his disposable monthly income could repay his student loans. 2011 Bankr. LEXIS 4831 (9th Cir. BAP Nov. 8, 2011).

Q: Can I meet the first Brunner prong if mental health issues prevent me from working?

A: Yes.

In Gray, the Oregon bankruptcy court determined that a debtor who lived in an old trailer and survived on disability and food stamps met the first Brunner prong based on a psychologist's report that his personality disorders prevented him from working. The court determined the debtor's income was barely sufficient to sustain even a marginal lifestyle, let alone make his student loan payments. 2006 Bankr. LEXIS 4230 (Bankr. D. Or. June 19, 2006).

Q: Do I need to look for a higher paying job to meet the first Brunner prong?

A: To avoid issues at trial, yes.

In Blackbird, the Ninth Circuit BAP narrowly rejected the argument that the debtor failed the first prong of the Brunner test because he did not maximize his efforts to find a better job in light of his degrees and good health. In Degroot, the Oregon district court was not persuaded by the argument that a debtor failed to meet the first Brunner prong because she let her accounting degrees lapse to open a struggling yarn store in Portland.

Q: Do I need to work overtime or take on a second job to meet the first Brunner prong?

A: Not necessarily but you should work at least 40 hours per week if possible.

In Williams, the Ninth Circuit determined a debtor did not meet the first Brunner prong because he worked only ten months out of the year, and testified he would work even less if his student loans were discharged. 9 Fed. Appx. 696 (9th Cir. 2001).

Q: Can I own a home and still meet the first Brunner prong?

A: Yes, so long as your equity is not excessive and all bedrooms are occupied.

In Degroot, the Oregon district court was not persuaded by the argument that a debtor failed to meet the first Brunner prong because she should have sold her home to cash in her equity. However, the court ultimately denied the debtor a discharge because she failed to find roommates for her two unoccupied rooms.

Q: Can I meet the first Brunner prong if my income will soon decrease?

A: Probably, depending on your age and health.

In Sequeira, the Oregon bankruptcy court considered a debtor's age and medical difficulties in determining that she satisfied the first Brunner prong. The court reasoned that although the debtor had $176 disposable income to repay her student loans each month, she wouldn't be able to sustain those payments for more than another seven and a half years. Accordingly, the court granted her partial student loan discharge.

Q: Do I meet the first Brunner prong if my student loan payments are so large I could never pay them off?

A: Yes, so long as you've taken all efforts to maximize your income, reduce expenses, and you still could never realistically payoff your loan balance.


In Blackbird, the Ninth Circuit bankruptcy court determined the debtor met the first prong of the Brunner test because even though his restaurant meals, skydiving expenses, and cable television expenses were not reasonably necessary, his disposable income was so low, he could not realistically repay his entire debt amount. Despite his multiple degrees and good health, the debtor owed over $217,000 in student loans and earned $1,661 net income as a customer service representative at Lowe's.

In Carnduff, the Ninth Circuit BAP ruled that debtors satisfied the first Brunner prong because even the modest reductions in expenses proposed by the Department of Education would be inadequate to fully amortize the entire amount of their student loan debt.

In Rifino, the Ninth Circuit overlooked a debtor's tanning, cable television, and monthly new car payments because she wouldn't have been able to pay her student loans even if she had removed these expenses from her budget.

Q: Can I meet the first Brunner prong if my student loans are from graduate school?

A: Yes.

In Blackbird, the Ninth Circuit BAP allowed a debtor with over $217,000 in medical school student loans earning $1,661 per month to pass the first Brunner prong. In Hedlund, the Ninth Circuit allowed a former law school student who couldn't pass the bar to discharge most of his $85,000 student loan debts.

Q: Do I have to apply for an income-based repayment plan to meet the first Brunner prong?

A: Generally yes; Oregon courts want to see whether you can afford an income-based repayment plan payment after deducing your monthly expenses from your monthly income.

In Freeland, the Oregon bankruptcy court ruled that debtors did not satisfy the first Brunner prong because they could have afforded monthly income-based repayment plan ("IBRP") payments by reducing their monthly expenses. 2015 Bankr. LEXIS 2991 (Bankr. D. Or. Sept. 2, 2015). In Cianciulli, the Oregon bankruptcy court refused to discharge $89,000 in student loans under the first Brunner prong because requiring debtors to make a monthly IBRP payment of $408 based on net income of $2,800 was not unconscionable. 2005 Bankr. LEXIS 1129 (Bankr. D. Or. June 7, 2005).

The second Brunner prong will be discussed in next week's post.

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Michael Fuller is a partner at Olsen Daines in Portland, Oregon and a consumer law adjunct professor at Lewis & Clark Law School.