Thursday, October 15, 2015
Discharging Student Loans in Oregon Bankruptcy Courts - Part 3 of 5
This post discusses how to meet the second prong of the Brunner undue hardship test in Oregon bankruptcy courts.
This is the third post of a five-part Q&A series about discharging student loans in Oregon. Prior posts 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, introduced the undue hardship exception under the Brunner three-prong test, and examined the first Brunner prong.
Q: How do I meet the second prong of the Brunner test?
A: You must prove your undue hardship will continue in the future.
The first Brunner prong examines whether your current expenses and earnings leave no monthly disposable income to make your student loan payments. Assuming you meet the first prong, the second prong examines your future financial prospects.
In Mason, the Ninth Circuit ruled that the second prong required proof of at least one ‘additional circumstance’ indicating a debtor’s state of affairs was likely to persist in the future. In Carnduff, the Ninth Circuit BAP determined that the second prong must be proved by a preponderance of the evidence standard (meaning more likely than not).
Q: What types of circumstances satisfy the second Brunner prong?
A: Over a dozen types of circumstances may qualify.
In Nys, the Ninth Circuit listed various circumstances that could satisfy the second Brunner prong, including: 1) serious mental or physical disability of a debtor or a debtor's dependents which prevents employment or advancement; 2) a debtor's obligations to care for dependents; 3) lack of, or severely limited education; 4) poor quality of education; 5) lack of usable or marketable job skills; 6) underemployment; 7) maximized income potential in the chosen educational field, and no other more lucrative job skills; 8) limited number of years remaining in a debtor's work life to allow payment of the loan; 9) age or other factors that prevent retraining or relocation as a means for payment of the loan; 10) lack of assets, whether or not exempt, which could be used to pay the loan; 11) potentially increasing expenses that outweigh any potential appreciation in the value of a debtor's assets and/or likely increases in a debtor's income; 12) lack of better financial options elsewhere.
The Nys opinion made clear that although a debtor can’t purposely choose a lifestyle that prevents her from repaying her student loans, her additional circumstances need not be any more compelling or extreme than that of an ordinary person in debt. The court ruled that the second Brunner prong may be satisfied even in the absence of any serious illness or psychiatric problems.
Q: Can I meet the second Brunner prong if I’m eligible for retraining?
A: It depends whether a new career will allow you to repay your student loans.
In Rosen, the Oregon bankruptcy court ruled that the second Brunner prong was met based on evidence a debtor’s financial status was likely to deteriorate in the future. The court reasoned that the debtor was permanently disabled with no college education or specialized skills. Although he was eligible for vocational retraining, the court saw no evidence that retraining would allow him to obtain a better paying job.
Q: Can I satisfy the second Brunner prong if I’m relatively young?
A: Potentially, so long as your student loans are so large you’ll never be able to repay them in full.
In Carnduff, the Ninth Circuit BAP held that debtors met the second Brunner prong, even though they were young, educated, and likely to increase their incomes in the future. The court reasoned that although the debtors’ incomes were likely to increase, they would need to win the lottery or find a gold mine to repay their student loans in full. In Hedlund, the Oregon district court determined that a debtor passed the second Brunner prong because despite his youth, education, and good health, even a full time well-paying position in the future wouldn’t allow him to make payments during the repayment period that would ultimately pay off his loans.
Q: Do I satisfy the second Brunner prong if I’m disabled?
A: Probably, so long as your disability is permanent and your benefits don’t allow you to repay your student loans in the future.
In Pena, the Ninth Circuit held that a debtor met the second Brunner prong based on her disability. The court was persuaded by her testimony that her mental impairment was permanent, and that she had already qualified for disability benefits. In Jorgensen, the Ninth Circuit BAP held a debtor passed the second Brunner prong because although her cancer may have been unlikely to return, she still suffered anemia, hypothyroidism and high blood pressure that limited her ability to work.
However, in Nichols, the Ninth Circuit BAP held debtors did not pass the second Brunner prong because although they had health problems, they did not establish they were disabled and could not work. 2013 Bankr. LEXIS 4623 (9th Cir. BAP July 9, 2013).
Q: Can I satisfy the second Brunner prong if I received no educational benefit from my student loans?
A: Yes, so long as your poor education is keeping you from repaying your loans in the future.
In Pena, the Ninth Circuit held that a debtor met the second Brunner prong based on his lack of job potential. The court held that whether the debtor received any educational value from his student loans at ITT were relevant to his future ability to repay his debts.
Q: Can I satisfy the second Brunner prong if I have ADD?
A: Yes, so long as your ADD will keep you from repaying your loans in the future.
In Mason, the Ninth Circuit held a debtor passed the second Brunner prong because his life-long learning disability impacted his ability to succeed. Although the debtor attended law school, he received special accommodations, and had difficulty holding positions that require attention to detail. The court dismissed the argument that the debtor’s disability should not be an additional factor because he was disabled prior to receiving his student loans. The debtor was ultimately granted a partial discharge, based on evidence his situation would improve in the future. In Mendoza, the Ninth Circuit held that a debtor passed the second Brunner prong because his ADD presented a substantial barrier preventing him from improving his state of affairs. The court was persuaded by the fact that the debtor had lived at or below the poverty line and was occasionally homeless. Although he previously attended medical school, the court determined he was unable to afford prescription medication or even dental care that might help improve his situation. 182 Fed. Appx. 661 (9th Cir. 2006).
In Gray, the Oregon bankruptcy court ruled that a debtor passed the second Brunner prong because his mental impairments were “the stripes of his coat” and thus would not improve even through psychotherapy. 2006 Bankr. LEXIS 4230 (Bankr. D. Or. June 19, 2006).
Q: Can I satisfy the second Brunner prong if I earned a degree and am currently employed?
A: Only if an additional circumstance proves your future income will not be enough to repay your student loans.
In Williams, the Ninth Circuit ruled that the second Brunner prong requires “unique” or “exceptional” circumstances. The court held the debtor did not meet the second prong because although he had trouble finding work in the past, he was currently employed as a teacher. 9 Fed. Appx. 696 (9th Cir. 2001).
In Rifino, the Ninth Circuit determined that a debtor failed the second Brunner prong because her job as a social worker and her degree would likely allow her to increase her salary over time. In Birrane, the Ninth Circuit BAP held a debtor failed the second Brunner prong because no additional circumstances limited her road to financial recovery. The court noted the debtor was mentally healthy, educated, and could earn more money if her dance company took off. In Carter, the Ninth Circuit BAP held a debtor failed the second Brunner prong based on his testimony that he was in line for a promotion at work and expected a decrease in transportation expenses. 2011 Bankr. LEXIS 4831 (9th Cir. BAP Nov. 8, 2011).
Q: Can I satisfy the second Brunner prong if I have current monthly disposable income?
A: Yes, if your age and health make it likely you cannot work much longer.
In Sequeira, the Oregon bankruptcy court held a debtor passed the second Brunner prong because although she currently had $176 disposable income, she would not be able to sustain that income for more than another seven and a half years, based on her age and medical difficulties.
However, in Degroot, the Oregon district court ruled that where debtors choose to incur educational debt later in life, the fact that they will reach retirement age during the loan repayment period is not enough alone to meet the second Brunner prong. The court reasoned that the debtor’s financial circumstances were of her own choosing because she left her prior profession as a CPA to start a small business.
My next post will explore the third Brunner prong.
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