Supreme Court of the United States

Transcription

1 No IN THE Supreme Court of the United States October Term, 2014 BRIGHT FUTURES EDUCATIONAL CREDIT CORPORATION, Petitioner, v. SARA ESTUDIANTE, Respondent. ON APPEAL FROM THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR THE RESPONDENT Counsel for Respondent Team R. 30

2 QUESTIONS PRESENTED 1) WHETHER THE TOTALITY OF THE CIRCUMSTANCES TEST, RATHER THAN THE BRUNNER TEST, IS THE PROPER ANALYSIS WHEN DETERMINING MS. ESTUDIANTE S UNDUE HARDSHIP UNDER 11 U.S.C. 523(A)(8)? 2) WHETHER MS. ESTUDIANTE S ELIGIBILITY FOR A ZERO-PAYMENT INCOME CONTINGENT REPAYMENT PLAN IS A PER SE BAR AGAINST A FINDING OF UNDUE HARDSHIP UNDER 11 U.S.C. 523(A)(8)? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF AUTHORITIES... ii OPINIONS BELOW... iii STATEMENT OF JURISDICTION... iii STATUTORY PROVISIONS... iii STANDARD OF REVIEW... iii STATEMENT OF THE CASE...1 SUMMARY OF THE ARGUMENT...4 ARGUMENT...8 I. BASED ON THE TOTALITY OF THE CIRCUMSTANCES TEST, FORCING MS. ESTUDIANTE TO REPAY HER EDUCATIONAL LOANS WOULD CONSTITUTE AN UNDUE HARDSHIP UNDER 11 U.S.C. 523(A)(8)....8 A. The Totality of the Circumstances Test is the Proper Analysis When Evaluating Undue Hardship Congressional intent supports application of the totality of the circumstances test Under the totality of the circumstances test, requiring Ms. Estudiante to repay her educational loans would be an undue hardship i. The current and future financial resources of Ms. Estudiante are minimal ii. iii. Ms. Estudiante s necessary and reasonable living expenses for herself should be considered Ms. Estudiante s age should be considered as a unique circumstance surrounding her financial situation B. The Brunner Test For Determining Undue Hardship Should Be Rejected The Brunner test is outdated ii

4 2. The good faith requirement of the Brunner test is an impractical standard Even if the Brunner test is adopted, Ms. Estudiante is entitled to discharge of her educational loans based on undue hardship i. Based on current income and expenses, Ms. Estudiante cannot maintain a minimal standard of living for herself if forced to repay her educational loans ii. Ms. Estudiante s current state of affairs is likely to persist for a significant portion of the repayment period of the student loans...18 iii. Ms. Estudiante acted in good faith II. MS. ESTUDIANTE S ELIGIBILITY FOR A ZERO-PAYMENT INCOME CONTINGENT REPAYMENT PLAN DOES NOT PER SE PRECLUDE A FINDING OF UNDUE HARDSHIP UNDER 11 U.S.C. 523(A)(8) A. An ICRP does not provide a fresh start to Ms. Estudiante Congress set forth the bankruptcy code to provide a fresh start to borrowers A zero-payment ICRP does not provide Ms. Estudiante a fresh start B. The availability of a zero-payment ICRP to Ms. Estudiante is only one factor and is not per se dispositive in the undue hardship determination The circuit courts are unanimous in holding that zero-payment ICRP eligibility is not per se a bar against a finding of undue hardship A zero-payment ICRP is only one factor in the undue hardship determination C. Congress Intended Bankruptcy Courts, Not Administrative Agencies, To Determine Dischargeability A holding that zero-payment ICRP eligibility is a per se bar on a finding of under hardship is an abdication of the court s duty to determine whether student loans are dischargeable Congressional intent, understood through canons of statutory interpretation, reveals the error of the per se rule iii

5 3. Congress has provided borrowers with the freedom to choose between two available paths for educational loan relief CONCLUSION...33 APPENDIX A... I iv

6 TABLE OF AUTHORITIES UNITED STATES SUPREME COURT CASES Bousley v. United States, 523 U.S. 614 (1998)...27 Hillman v. Maretta, 133 S. Ct (2013)...32 Millbrook v. United States, 133 S. Ct (2013)...27 Wilson v. Layne, 526 U.S. 603 (1999)...27 UNITED STATES CIRCUIT COURT CASES Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987) , 15,16, 18,19 Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009)...20, 27, 28 Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302 (10th Cir. 2004)....20, 21 In re Alderete, 412 F.3d 1200 (10th Cir. 2005)...27, 28 In re Andrews, 661 F.2d 702 (8th Cir. 1981)...9, 10, 11, 12, 18 In re Barrett, 487 F.3d 353 (6th Cir. 2007)...26, 27, 28, 33 In re Bogdanovich, 292 F.3d 104 (2d Cir. 2002)...23 In re Faish, 72 F.3d 298 (3d Cir. 1995)...9 In re Frushour, 433 F.3d 393 (4th Cir. 2005)...30 In re Long, 322 F.3d 549 (8th Cir. 2003)... viii, 8, 9, 10, 12 In re Mosko, 515 F.3d 319 (4th Cir. 2008)...28 In re Mosley, 494 F.3d 1320 (11th Cir. 2007)...28, 29 In re Nys, 446 F.3d 938 (9th Cir. 2006)...27 In re Reynolds, 425 F.3d 526 (8th Cir. 2005)...10 In re Riso, 978 F.2d 1151 (9th Cir. 1992) In re Spence, 541 F.3d 538 (4th Cir. 2008)...28 v

7 In re Stoltz, 315 F.3d 80 (2d Cir. 2002)...20, 23 In re Tirch, 409 F.3d 677 (6th Cir. 2005) In re Roberson, 999 F.2d 1132 (7th Cir.1993)...19 UNITED STATES DISTRICT COURT CASES In re Ekanasi, 271 B.R. 256 (S.D.W. Va. 2002) UNITED STATES BANKRUPTCY APPELLATE PANEL CASES In re Andresen, 232 B.R. 127 (B.A.P. 8th Cir. 1999) In re Bronsdon, 435 B.R. 791 (B.A.P. 1st Cir. 2010)...25, 26, 30 In re Cline, 248 B.R. 347 (B.A.P. 8th Cir. 2000)...8 In re Roth, 490 B.R. 908 (B.A.P. 9th Cir. 2013)...9, 10, 15, 16, 17 UNITED STATES BANKRUPTCY COURT CASES In re Block, 273 B.R. 600 (Bankr. W.D. Mo. 2002) In re Booth, 410 B.R. 672 (Bankr. E.D. Wash. 2009)...24 In re Bronsdon, No FJB, 2010 WL (Bankr. D. Mass. Jan. 8, 2010)...30 In re Brown, 249 B.R. 525 (Bankr. W.D. Mo. 2000) In re Crawley, 460 B.R. 421 (Bankr. E.D. Pa. 2011)...28 In re Durrani, 311 B.R. 496 (Bankr. N.D. Ill. 2004)...25 In re Fahrer, 308 B.R. 27 (Bankr. W.D. Mo. 2004)...10, 13, 14 In re Faktor, 306 B.R. 256 (Bankr. N.D. Iowa 2004)...11, 12, 14, 19 In re Johnson, 299 B.R. 676 (Bankr. M.D. Ga. 2003)...30 In re King, 368 B.R. 358 (Bankr. D. Vt. 2007)...31 In re Rutherford, 317 B.R. 865 (Bankr. N.D. Ala. 2004)...23 In re Thompsen, 234 B.R. 506 (Bankr. D. Mont. 1999)...25 vi

8 In re Walcott, 185 B.R. 721 (Bankr. E.D. N.C. 1995)...18 In re Wegfehrt, 10 B.R. 826 (Bankr. N.D. Ohio 1981)...9, 11 In re Wilson, 270 B.R. 290 (Bankr. N.D. Iowa 2001)...14 UNITED STATES STATUES 11 U.S.C. 523(a)(8) (2012)... viii, 8, 29, 31 FEDERAL REGULATIONS Code of Federal Regulations, 34 C.F.R. OTHER AUTHORITIES (b) (2013)...23, (b)(1)(ii) (2013) (b)(1)(iii) (2013) (b)(3)(iii)(A) (2013) (b)(3)(iii)(D) (2013)...23, (b)(3)(iv) (2013) (b)(1)(v) (2013)...23 Heather Struck, A Bad Credit Score Affects A Lot More Than Credit, Forbes (Jul. 20, 2011, 4:46 PM) INCOME-DRIVEN REPAYMENT PLANS FOR FEDERAL STUDENT LOANS (U.S. Dep t of Educ., 2014) Robert F. Salvin, Student Loans, Bankruptcy, and the Fresh Start Policy: Must Debtors Be Impoverished to Discharge Educational Loans?, 71 TUL. L. REV. 139 (1996) TAX TABLES (Internal Revenue Serv. 2014), available at vii

9 OPINIONS BELOW The Bankruptcy Court for the District of Moot entered an order discharging Ms. Estudiante s student loans, finding undue hardship under 11 U.S.C. 523(a)(8). (R. 6). The District Court of Moot reversed the decision of the bankruptcy court. (R. 7). On appeal, the Thirteenth Circuit Court of Appeals found for Ms. Estudiante, reversing the district court order in Case No (R. 14). This Court granted certiorari on December 5, (R. 1). STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS The relevant statutory provision involved in this case is listed below and reproduced in Appendix A: 11 U.S.C. 523(a)(8) (2012). STANDARD OF REVIEW A court s legal determination of undue hardship is subject to de novo review. In re Long, 322 F.3d 549, 553 (8th Cir. 2003). On review, the court must assess the legal effect of the [lower court s] findings as to [the borrower s] circumstances. Id. viii

10 STATEMENT OF THE CASE I. Factual Background Sara Estudiante s ( Ms. Estudiante ) life can be fairly characterized as tragic. Ms. Estudiante graduated from high school with honors and a promising future. (R. 4). Ms. Estudiante married Ron ( Mr. Estudiante ), her high school sweetheart. Id. In 1994, at age twenty-six, Ms. Estudiante enrolled at Moot State College seeking to enhance her education by obtaining a degree in business administration. Id. Three months prior to enrollment, Mr. and Ms. Estudiante had their first-born baby. Id. Mr. and Ms. Estudiante welcomed their second child during her sophomore year. Id. Ms. Estudiante performed well throughout her time at Moot State. Id. During Ms. Estudiante s junior year, Mr. Estudiante was stricken with illness, rendering him unable to work. Id. Mr. Estudiante s illness forced Ms. Estudiante to drop out of Moot State to care for her ailing husband and support her family. Id. To get by, she took a job as a Mallmart sales clerk. Id. Ms. Estudiante was never able to return to college. See Id. Tragically, Mr. Estudiante s condition worsened, and he soon passed away. Id. Ms. Estudiante was left alone to raise her two children. Id. She faced unpaid medical bills, student loans, and was barely able to make ends meet. Id. Several years ago, due to a depressed local economy and increased on-line competition, Mallmart cut Ms. Estudiante s hours, salary, and benefits with no expectation of restoration to pre-depression levels. (R. 5). During this time, Ms. Estudiante was still a widowed, single mother supporting two young children. Id. The decline in her income rendered Ms. Estudiante unable to make several mortgage payments as she sank deeper into debt to provide for her children. Id. The bank ultimately foreclosed on the family home. Id. Due to the poor economy, the home sold for 1

11 much less than the mortgage debt Ms. Estudiante owed, and after foreclosing on the home, the bank obtained a judgment against Ms. Estudiante for the shortfall. (R. 5-6). Ms. Estudiante is now forty-six. (R. 5). For several years, Ms. Estudiante has lived in poverty. Id. She has zero discretionary income. Id. Without her college degree and with few skills outside of her employment at Mallmart, Ms. Estudiante s prospects are not likely to improve. Id. Despite the fact that Ms. Estudiante s kids are now grown adults, she will expectedly continue to live below the poverty level. Id. Through the hardship, Ms. Estudiante did not make student loan payments and she remains unable to afford to do so. Id. Ms. Estudiante has not requested any alternative payment options, including an income contingent repayment plan ( ICRP ). Id. Under an ICRP, if Ms. Estudiante s low income persists, her monthly payment would be zero dollars. Id. Ms. Estudiante currently owes over $48,000 in student loans, with interest accruing at approximately $1,700 per year. Id. This debt alone is more than 200% of Ms. Estudiante s total annual income. Id. The student loan debt, along with the bank s deficiency judgment and aggressive collection efforts associated with other past-due debts, caused Ms. Estudiante to turn to chapter seven bankruptcy for relief. (R. 6). II. Nature of the Proceedings Ms. Estudiante initiated an adversary proceeding in the United States Bankruptcy Court for the District of Moot against the creditor of her education loans, Bright Futures Education Credit Corporation ( Bright Futures ), seeking discharge of her loans under 11 U.S.C. 523(a)(8). Id. During the bench trial, Bright Futures argued that the Brunner test should be utilized to determine undue hardship. Id. (citing Brunner v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987)). Bright Futures also argued that Ms. Estudiante s eligibility for 2

12 an ICRP per se precluded the court from finding undue hardship. Id. The Honorable Kelly E. Porcelli rejected Bright Futures arguments and applied the totality of the circumstances test, finding that Ms. Estudiante s student loans imposed an undue hardship and thus discharged the loans. Id. Bright Futures appealed the decision to the United States District Court for the District of Moot, challenging only the legal issues raised below. Id. The Honorable Arianna Efstathiou reversed the Bankruptcy Court. Id. The district court held that the Brunner test must be used to determine undue hardship. Id. The district court also held that an availability of a zero-payment ICRP precludes a finding of undue hardship, under any circumstance, as a matter of law. (R. 7). Ms. Estudiante appealed the decision of the district court to the United States Court of Appeals for the Thirteenth Circuit. Id. Delivering the opinion of the court, Judge Roe held that the totality of the circumstances test must be used to determine undue hardship. (R. 11). The court also held that an available ICRP should not be considered under the undue hardship analysis unless the borrower has actually enrolled in an ICRP. Id. Bright Futures appealed to the United States Supreme Court. (R. 7) This Court granted certiorari on two questions: whether the totality of the circumstances test is the proper analysis when determining whether Ms. Estudiante s student loan debt created an undue hardship under 11 U.S.C. 523(a)(8) and whether Ms. Estudiante s eligibility for a zero-payment ICRP is a per se bar against a finding of undue hardship under 11 U.S.C. 523(a)(8). (R. 1). 3

13 SUMMARY OF THE ARGUMENT This Court should affirm the Court of Appeals for the Thirteenth Circuit and hold that repayment of Ms. Estudiante s student loans would create an undue hardship under 11 U.S.C. 523(a)(8). In affirming the Bankruptcy Court for the District of Moot, the Thirteenth Circuit properly held that a determination of whether payment of student loans would create an undue hardship should be analyzed under the totality of the circumstances test because Congress intended to grant bankruptcy courts the power to discharge student loan debt based on all relevant factors attributable to a particular borrower. Under the totality of the circumstances test, Ms. Estudiante met her burden of showing that being forced to repay her student loans would create an undue hardship because she is unable to earn sufficient income to maintain a minimal standard of living. Forced to drop out of college to care for her terminally ill husband and dependent children, Ms. Estudiante did not obtain the degree she originally sought when taking out her education loans. As a result, Ms. Estudiante lacks the skills necessary to find employment beyond her current sales job at Mallmart. Even though she works as much as her employer allows, Ms. Estudiante earns an annual income below the federal poverty line, and improvement of her financial condition is effectively hopeless now and in the future. Regardless of how minimally Ms. Estudiante lives, she does not have the means to repay her student loans. The bankruptcy court properly determined that being forced to do so would be an undue hardship for Ms. Estudiante. In affirming the Thirteenth Circuit, this Court should reject the test developed by the Second Circuit Court of Appeals in its 1985 decision in Brunner v. New York State Higher Education Services Corp. The Brunner test is far more rigid than Congress intended the undue hardship determination to be because it creates three separate requirements that must each be 4

14 satisfied in order for debt to be discharged, rather than allowing for a consideration of the entirety of an individual borrower s circumstances. This has the effect of denying discharge when a borrower fails to meet any of the three requirements, even though undue hardship may actually exist. Even under the Brunner test, however, Ms. Estudiante still satisfies the undue hardship requirements because she cannot maintain a minimal standard of living if forced to repay her debt. The best evidence of this is that Ms. Estudiante cannot currently maintain a minimal standard of living, even though she has zero discretionary income. Additionally, it is undisputed that the circumstances that currently subject Ms. Estudiante to poverty are extremely unlikely to improve at any point in the future. Finally, the facts of Ms. Estudiante s life show that she has made good faith efforts to repay her loans. When her husband passed away, leaving her a widowed mother with two dependent children, Ms. Estudiante went to work as a clerk at Mallmart in an effort to provide for her family. Despite her best efforts, Ms. Estudiante was unable to make even minimal payments without sacrificing unnecessarily the most basic necessities for herself and her children. Even though repayment of Ms. Estudiante s student loans would create an undue hardship under either the totality of the circumstances test or the Brunner test, Bright Futures claims that Ms. Estudiante s decision not to enroll in a zero-payment income contingent repayment plan ( ICRP ) acts as a per se bar to discharge. Its theory is that choosing not to enroll, despite all other evidence to the contrary, is dispositive of the fact that Ms. Estudiante is a bad-faith borrower. This argument is unpersuasive. 5

15 The central objective of bankruptcy is to provide a fresh start for borrowers. The reasons for this are myriad. Borrowers who are consumed by debt cannot contribute positively to the nation s economy. Additionally, their inability to provide for themselves and their dependents can indirectly lead to negative consequences such as undesired divorce, criminal activity, and even suicide. Although enrollment in an ICRP can create the financial ability for a borrower to manage his or her debt obligations, this is not the case for all. It is certainly not the case for Ms. Estudiante. Even though she would not likely be required to make a payment under an ICRP, Ms. Estudiante s debt would loom over her until it is cancelled at the end of the twenty-five year period required by the program. At this point, Ms. Estudiante s debt would have grown to massive proportions more than $100,000. The cancellation of this debt would create an income tax liability that would likely exceed her current annual income. At this time, Ms. Estudiante would be seventy-one years old, well beyond the age that she will likely be able to maintain gainful employment. All federal circuit courts have properly rejected the argument that failure to enroll in a zero-payment ICRP is a per se bar on finding undue hardship. Instead, they have treated ICRP eligibility as it should be treated: one factor in the undue hardship analysis. In so doing, the circuit courts have adhered to proper canons of statutory construction by allowing bankruptcy courts, rather than the agencies that administer the ICRPs, to determine whether denial of discharge would create an undue hardship for a borrower. This structure respects Congress intent to provide two separate paths for education loan borrowers. One path is the ICRP program, while the other path is bankruptcy discharge under the undue hardship exception. To make 6

16 enrollment in an ICRP a threshold requirement to discharge improperly disregards the express will of Congress. For these reasons, Ms. Estudiante asks this Court to affirm the Thirteenth Circuit in holding that the denial of discharge of her student loan debt creates an undue hardship for Ms. Estudiante. 7

17 ARGUMENT I. BASED ON THE TOTALITY OF THE CIRCUMSTANCES TEST, FORCING MS. ESTUDIANTE TO REPAY HER EDUCATIONAL LOANS WOULD CONSTITUTE AN UNDUE HARDSHIP UNDER 11 U.S.C. 523(A)(8). In order to prevent recent college graduates from escaping extensive student loan debt, 11 U.S.C. 523(a)(8) of the Bankruptcy Code was enacted and only provides discharge for a borrower from his or her educational loans if he or she can establish that such debt would be an undue hardship. In re Long, 322 F.3d 549, 554 (8th Cir. 2003). Ms. Estudiante s ill-fated financial circumstance is precisely the type of situation that the undue hardship exception in 11 U.S.C. 523(a)(8) was intended to provide relief. A borrower's educational loan debt may be discharged based upon statutory provision 11 U.S.C. 523(a)(8) of the Bankruptcy Code, which provides that educational loans are not dischargeable in a bankruptcy proceeding unless, excepting such debt from discharge under this paragraph will impose an undue hardship on the borrower and the borrower's dependents. 11 U.S.C. 523(a)(8) (2012). The court of appeals correctly rejected the Brunner test and appropriately applied the totality of the circumstances test, finding undue hardship if Ms. Estudiante is forced to repay her educational loans. Thus, the court appropriately discharged her debt after taking into account her current and future financial resources, her necessary and reasonable living expenses, and other circumstances surrounding her educational debt. In re Cline, 248 B.R. 347, 349 (B.A.P. 8th Cir. 2000). Even if this Court applies the Brunner test, reversal is not appropriate, as repayment of Ms. Estudiante s debt would be unreasonably burdensome and would impose an undue hardship. Consequently, discharge was appropriate. 8

18 A. The Totality of the Circumstances Test is the Proper Analysis When Evaluating Undue Hardship. The totality of the circumstances test was first enunciated in Andrews v. South Dakota Student Loan Assistance Corporation by the Eighth Circuit in In re Andrews, 661 F.2d 702 (8th Cir. 1981). When determining undue hardship, the totality of the circumstances test aptly involves consideration of three factors: (1) the current and future financial resources of the borrower and the borrower's dependents; (2) the borrower's reasonable living expenses; and (3) any other facts that apply uniquely to the particular case. In re Long, 292 B.R at 638. The Thirteenth Circuit joined the Eighth Circuit in properly applying the totality of the circumstances test, finding undue hardship if Ms. Estudiante is forced to repay her debt. 1. Congressional intent supports application of the totality of the circumstances test. The term undue hardship is not defined by Congress in the Bankruptcy Code. In re Andrews, 661 F.2d 702 at 704. The definition was left to the bankruptcy courts to craft. In re Roth, 490 B.R. 908, 920 (B.A.P. 9th Cir. 2013). Thus, courts have reviewed undue hardship on a case-by-case basis. In re Long, 322 F.3d at 554; In re Faish, 72 F.3d 298, (3d Cir.1995); Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987); In re Andrews, 661 F.2d at 704. The Eighth Circuit in In Re Wegfehrt quoted the report of the Commission on the Bankruptcy Laws of the United States determining that Congress intent was to permit discharge when the borrower can demonstrate that for any reason he [or she] is unable to earn sufficient income to maintain himself [or herself] and his [or her] dependents and to repay the educational debt. In re Wegfehrt, 10 B.R. 826, 830 (Bankr. N.D. Ohio 1981) (quoting Commission on the Bankruptcy Laws of the United States, Pt. II, p. 140, n.15). The Eighth Circuit in In re Andresen 9

19 further stated [r]igid adherence by the court to a particular test robs the court of the discretion envisioned by Congress in drafting 523(a)(8)(B).... [T]he more equitable approach is to view each case in the totality of the circumstances involved. In re Andresen, 232 B.R. 127, 138 (B.A.P. 8th Cir. 1999). When examining congressional intent, the appropriate test for determining undue hardship is the totality of the circumstances test because it examines all the individual facts and circumstances surrounding a borrower s specific case. In re Long, 322 F.3d at 554; In re Reynolds, 425 F.3d 526, 529 (8th Cir. 2005); In re Fahrer, 308 B.R. 27, 32 (Bankr. W.D. Mo. 2004). Congress did not draw bright lines, but instead presumably intended that bankruptcy courts have the flexibility to make fact-based decisions in individual cases about the need for student loan debt relief. In re Roth, 490 B.R. at 923. Adhering to Congress intent, this Court should take into account all facts and circumstances surrounding Ms. Estudiante s case. The court of appeals specifically found that Ms. Estudiante is unable to earn sufficient income to maintain a minimal standard of living and repay her educational debt. (R. 5). Ms. Estudiante is widowed. (R. 4). She has no college degree. Id. She lives below the federal poverty level and has for several years. (R. 5). She lacks the skills necessary to rise above her current status. Id. Congress intended all of these facts to be reviewable by the court under the totality of the circumstances test when determining undue hardship. 2. Under the totality of the circumstances test, requiring Ms. Estudiante to repay her educational loans would be an undue hardship. The totality of the circumstances test considers the current and future financial resources of Ms. Estudiante, her reasonable living expenses, and other unique circumstances surrounding her case. In re Long, 292 B.R. at 638; In re Andrews, 661 F.2d at 702. There are several case- 10

20 specific unique factors that have been considered by courts. In re Powers, 235 B.R. 894, 900 (Bankr. W.D. Mo. 1999). Under the totality of the circumstances test, the court of appeals properly analyzed all of the facts surrounding Ms. Estudiante s case and determined undue hardship, thus discharging her student loan debt. i. The current and future financial resources of Ms. Estudiante are minimal. Under the first factor of the totality of the circumstances test, the borrower's past, present and reasonably reliable future financial resources should be taken into account by the court. In re Block, 273 B.R. 600, 604 (Bankr. W.D. Mo. 2002). The bankruptcy court should consider any information about the borrower's present employment status and employment prospects. In re Andrews, 661 F.2d at 705. Courts also look to the borrower s future economic prospects. [T]he rate and amount of [the borrower s] future resources should be estimated reasonably in terms of ability to obtain, retain, and continue employment and the rate of pay that can be expected. In re Wegfehrt, 10 B.R. at 830, (quoting Comm'n on the Bankruptcy Laws of the United States, Report, Pt. II, 140 n.15, n.17). In In re Faktor, the borrower was a widow with no dependents, was college educated, and did not have health problems that prevented her from working. In re Faktor, 306 B.R. 256, 263 (Bankr. N.D. Iowa 2004). However, after financing her teaching degree through student loans, the borrower was not able to obtain a teaching position. Id. She ultimately worked at a factory for nine years and then self-employed on a small scale. Id. The Faktor court applied the totality of the circumstances test to consider whether undue hardship existed. Id. at 262. The court first determined that dischargeability depends on the borrower s future ability to pay the entire student loan obligation. Id. The court then considered 11

21 the borrower s long-term economic prospects, explaining that even if she were to obtain a high paying position and generate enough income for twenty-five years, she would be seventy-six years old at the end of her payment period. Id. at 263. This would force her to work ten years beyond her normal retirement age. Id. The court ultimately concluded that the borrower did not have the ability to repay the loan while maintaining a minimal standard of living and thus discharged her debt. Id. at In this case, due to events outside of Ms. Estudiante s control, her monthly educational loan obligations far exceed her future financial resources. (R. 5). Similar to the borrower in Faktor, Ms. Estudiante is a widow with no dependents. (R. 4). However, she presently has few skills and at age forty-seven, with her only work experience being a sales clerk at Mallmart, she is not likely to find higher employment in the future. (R. 5). Further, while Ms. Estudiante is currently not at risk of losing her job, her work hours, salary, and benefits were reduced several years ago and there is no expectation that the situation will improve. Id. Considering the totality of the circumstances surrounding Ms. Estudiante s minimal financial resources, the court of appeals correctly found undue hardship, and thus discharged her debt. ii. Ms. Estudiante s necessary and reasonable living expenses for herself should be considered. Under the totality of the circumstances test, courts also consider whether borrowers could support themselves while also paying student loans. Andrews, 661 F.2d at 704. Courts generally do not deny lifestyle choices that appear reasonable and necessary, even if they are not economic necessities, so long as they are not excessive. Long, 271 B.R. at 331 (citing A. Mechele Dickerson, Lifestyles of the Not-So-Rich or Famous: The Role of Choice and Sacrifice in Bankruptcy, 45 BUFF. L. REV. 629, 638 (1997)). 12

22 In In re Fahrer, the creditor attacked the borrower s expenses as being unnecessary and unreasonable. In re Fahrer, 308 B.R. at 34. The court rejected the creditor s argument finding that while it might be possible to reduce certain living expenses, e.g., telephone bills and payments to counsel, such adjustments did not give the borrower sufficient net monthly income to pay her debt. Id. The court concluded that with her present and reasonably anticipated future income and expenses, the borrower could not make such payments while maintaining a reasonable standard of living. Id. at 36. Given Ms. Estudiante s current financial situation, she would be unable to maintain a reasonable standard of living, including anticipated future expenses, while also making payments toward her debt. Nothing in the record indicates that Ms. Estudiante has any expenses that are extravagant or unreasonable. Even though Ms. Estudiante s children are grown and do not currently require support, the fact remains that Mallmart cut her hours, salary, and benefits, with no expectation of restoration. (R. 4-5). Moreover, it is rational to assume that certain living expenses are impossible to reduce given Ms. Estudiante s everyday needs and level of income. Under the consideration of whether a borrower s living expenses are necessary and reasonable, these factual findings support the Thirteenth Circuit s undue hardship determination that Ms. Estudiante would be unduly burdened if forced to repay her debt. (R. 7). iii. Ms. Estudiante s age should be considered as a unique circumstance surrounding her financial situation. Finally, under the totality of the circumstances test, courts should consider a borrower s age when evaluating undue hardship if he or she is required to participate in an income contingent repayment plan ( ICRP ) and the efficacy of that relief under the circumstances. In re Fahrer, 308 B.R. at 34. See In re Brown, 249 B.R (Bankr. W.D. Mo. 2000) ( The age of a borrower becomes a relevant circumstance to be considered by the court in making an undue 13

23 hardship determination.... Requiring someone to repay a student loan under a repayment schedule that far exceeds one's average working life imposes an undue hardship on the borrower. ); In re Faktor, 306 B.R. at (finding undue hardship if borrower forced to participate in an ICRP as the borrower would be seventy-six years old at end of the repayment period). Creditors may argue that the availability of an ICRP means that repayment of a loan, based on the borrower s income, cannot constitute an undue hardship. However, the availability of the ICRP is only one of the factors for courts to consider in determining whether forcing a borrower to repay a student loan would impose an undue hardship. See In re Wilson, 270 B.R. 290, (Bankr. N.D. Iowa 2001). In Fahrer, the court stated that given the borrower s past, present, and likely future income and expenses, it is highly likely she would have to be in the ICRP for the full twenty-five years. In re Fahrer, 308 B.R. at 35. At the end of the twenty-five year period, she would still not repay the entire amount and would then receive a cancellation of the unpaid balance and would be liable for the resulting tax consequences. Id. At the end of the repayment period, the borrower would be seventy-eight years old, which would take her well beyond an expected working age. Id. The court ultimately decided that to deny discharge, requiring the borrower to participate in an extended repayment plan that significantly exceeds the borrower s working life, would be an undue hardship. Id. at 36. Just as in Fahrer, requiring Ms. Estudiante, at the age of forty-six, to participate in an extended repayment plan would significantly exceed Ms. Estudiante s working life, resulting in an undue hardship. (R. 5). Ms. Estudiante would be seventy-one years old at the end of the twenty-five year repayment period, which, like the borrower in Fahrer, takes her beyond an 14

24 expected working age. Id. Ms. Estudiante would similarly face a cancellation of the balance of the debt, which would result in significant income tax liability. Given Ms. Estudiante s poor financial state, she would be unable to meet this heavy tax burden. Id. Thus, this Court should take into account that at the age of forty-six, demanding Ms. Estudiante to repay her educational debt would constitute an undue hardship under the requirements of an ICRP. Id. The court of appeals correctly applied the totality of the circumstances test, taking all facts and circumstances into account, and appropriately found undue hardship if Ms. Estudiante were required to pay her educational debt. B. The Brunner Test For Determining Undue Hardship Should Be Rejected. The Brunner test was first established by the Second Circuit in Brunner v. New York State Higher Education Services Corp. in Brunner, 832 F.2d at 395. The Brunner test involves three elements that must be individually met before a debt may be discharged: (1) that the borrower 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 the state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the borrower has made good faith efforts to repay the loans. Brunner, 832 F.2d at 396. There is no compelling argument for adopting the Second Circuit s stringent Brunner test. The Thirteenth Circuit s determination of undue hardship was proper under the totality of the circumstances test and should not be overturned. 1. The Brunner test is outdated. The Bankruptcy Code has changed considerably since Brunner was decided. In re Roth, 490 B.R. at 922 (Pappas, J., concurring). The nation s loan debt continues to rise at an exponential rate, and consequently, the Brunner test does not appropriately reflect reality. Id. at 15

25 920. The Brunner test is ultimately too narrow of an approach when deciding whether discharge of student loan debt for undue hardship is warranted. Id. Judge Pappas, in his concurring opinion in In re Roth, stated, [w]hile [the Brunner test] might have been appropriate and helpful when adopted, respectfully, the Brunner test for determining undue hardship is truly a relic of times long gone. Id. In 1985, Brunner was decided to implement the original student loan hardship discharge exception from the then new Bankruptcy Code. Id.; Brunner, 831 F.2d at 396. In Brunner, the borrower filed bankruptcy just a few months after she obtained her master s degree. Brunner, 831 F.2d at 397. The borrower applied for exception from her debts, even though she was only unemployed for a few months and made no attempt to pay on the loans. Id. Brunner typified the sort of student loan discharge cases encountered by bankruptcy courts at that time. In re Roth, 490 B.R. at 921(emphasis added). According to Judge Pappas, [n]ot surprisingly, in addition to articulating its now-famous test, the Brunner court held that the borrower had not made a case for an undue hardship discharge in part because, given her circumstances, she had not made a good faith effort to repay the modest debt. Id. Since Brunner, times have changed. Id. at 922. [T]he cost of both private and public education has skyrocketed. (R. 3). Nearly all students must finance their higher education degrees through loans. In re Roth, 490 B.R. at 922. As a result, delinquent student loans are at a record high. Id. Similar to Ms. Estudiante, many outstanding student loan debts are now decades old, owed by borrowers who never really had the ability to make substantial payments on the balances. Id. Judge Pappas urges the courts to reject the Brunner test and apply the totality of the circumstances test, in order to adjust to the new realities of student loan debt: Unlike in Brunner, bankruptcy courts must frequently attempt to predict a borrower's potential to repay a six-digit educational 16

26 obligation over his or her entire lifetime. In many of those cases, the benefit the borrower received from the education or training financed with these loans may be marginal, and the balances due to creditors exceed the borrower's debt-service abilities. It would seem that in this new, different environment, in determining whether repayment of a student loan constitutes an undue hardship, a bankruptcy court should be afforded flexibility to consider all relevant facts about the borrower and the subject loans. But Brunner does not allow it. In addition to requiring that a borrower demonstrate a current inability to pay a student loan while maintaining a minimal standard of living, Brunner mandates that the borrower show additional circumstances to prove that his or her impecunious status will persist into the future. Requiring that a borrower demonstrate that his or her financial prospects are forever hopeless is an unrealistic standard. Id. at (internal citations omitted). Thus, the Brunner test should be rejected. 2. The good faith requirement of the Brunner test is an impractical standard. The good faith requirement of the Brunner test mandates that a borrower show that he or she has made good faith efforts to repay a student loan, and such a mandate is not an appropriate measure of undue hardship in all circumstances. Id. at 923. Requiring a borrower to meet this impossibly high standard can doom a borrower to decades of burdensome debt. Id. [The good faith prong] of the Brunner test also fails to account for the potentially devastating debtforgiveness tax consequences to the borrower resulting from the successful completion of such a program, which is why repayment programs are ineffective under some circumstances. Id. Further, as a matter of statutory construction, this prong of the test lacks any textual basis in the Bankruptcy Code. Id. Consequently, the Brunner test should be rejected and the totality of the circumstances test should be applied. 17

27 3. Even if the Brunner test is adopted, Ms. Estudiante is entitled to discharge of her educational loans based on undue hardship. The Brunner test would require Ms. Estudiante to show that she cannot maintain a minimal standard of living based on her current income, that her poor financial prospects are likely to continue, and, finally, that she has made a good faith effort to repay her student loans. Brunner, 831 F.2d at 396. Even if the Brunner test were applied, Ms. Estudiante would still meet the undue hardship requirement. i. Based on current income and expenses, Ms. Estudiante cannot maintain a minimal standard of living for herself if forced to repay her educational loans. Under the first Brunner requirement, undue hardship may be demonstrated when for any reason he [or she] is unable to earn sufficient income to maintain himself [or herself] and his [or her] dependents and to repay the educational debt. In re Andrews, 661 F.2d at 704. The facts of the record clearly show that Ms. Estudiante does not have the means to support herself while also repaying her educational loans. (R. 4-5). Ms. Estudiante is working a job at Mallmart that produces annual income below the federal poverty level. (R. 5). Ms. Estudiante does not receive outside financial support. (R. 4). If forced to repay her loans she would not be able to maintain a minimal standard of living. Ms. Estudiante has demonstrated that she is unable to earn sufficient income to repay her loans, and thus discharge is appropriate under the first Brunner prong. ii. Ms. Estudiante s current state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Under the second requirement of the Brunner test, the borrower must show a certainty of hopelessness regarding repayment of student loans. In re Walcott, 185 B.R. 721, 724 (Bankr. E.D. N.C. 1995) (quoting In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993)). Such 18

28 circumstances have included illness, incapacity and other extenuating circumstances as they relate to the [borrower] or the [borrower's] family. In re Ekanasi, 271 B.R. 256, 262 (S.D. W. Va. 2002). Based on Ms. Estudiante s current state of affairs, she would experience a certainty of hopelessness if forced to repay her student loans. Ms. Estudiante does not and will not have sufficient income to repay her student loans. (R. 5). As a widow, she is a single-income earner. (R. 4). She was forced to repay hospital bills after the death of her husband, while simultaneously raising two children on her own. Id. As a result of economic factors beyond her control, she now lives below the poverty line with no hope of earning a significant income in the future. (R. 5). Ms. Estudiante s extenuating circumstances make it hopeless that she would be unable to repay her debts. As a result, such circumstances support discharge under this prong of the Brunner test. iii. Ms. Estudiante acted in good faith. The third requirement of the Brunner test requires the borrower to show that he or she has made a good faith effort to repay the student loan. Brunner, 831 F.25 at A borrower s good faith is measured by his or her efforts to obtain employment, maximize income and minimize expenses. In re Roberson, 999 F.2d 1132, 1136 (7th Cir.1993). The inquiry includes whether the [borrower] is culpable for causing her own poor financial health. Id. Courts should consider a [borrower s] financial condition over the entire history of the loans, not just the period during which the loan was in collection with the Department of Education. In re Faktor, 306 B.R. at 264. Ms. Estudiante acted in good faith from the time of borrowing. There is nothing in the record to indicate that she borrowed the money in bad faith. Her poor financial health is a result 19

29 of circumstances beyond her control, beginning with her husband s terminal illness before completing her degree, followed by her husband s death, the onset of the national depression, and all while raising two children on her own. (R. 4-5). Thus, under the third Brunner requirement, Ms. Estudiante acted in good faith. Under the totality of the circumstances test, a finding of undue hardship is appropriate if Ms. Estudiante is forced to repay her educational loans. The totality of the circumstances test takes into account all of the facts of an individual borrower s case, which is consistent with Congress intent under the undue hardship requirement of 11 U.S.C. 523(a)(8). The Brunner test should be rejected, as it is outdated and the good faith requirement is not an appropriate measure of undue hardship in all circumstances. The court of appeals properly determined undue hardship, and as a result, discharged Ms. Estudiante s debt under 11 U.S.C. 523(a)(8). II. MS. ESTUDIANTE S ELIGIBILITY FOR A ZERO-PAYMENT INCOME CONTINGENT REPAYMENT PLAN DOES NOT PER SE PRECLUDE A FINDING OF UNDUE HARDSHIP UNDER 11 U.S.C. 523(A)(8). Bankruptcy is designed to provide borrowers with a fresh start to their financial livelihood by discharging the debt they owe to creditors. In re Stoltz, 315 F.3d 80, 87 (2d Cir. 2002). However, in the Commission on the Bankruptcy Laws of the United States recommended that educational loans be nondischargeable until five years after the first payment on the loan comes due. Educational Credit Management Corp. v. Jesperson, 571 F.3d 775, 778 (8th Cir. 2009). The Commission s stated rational for its proposed exception to the general dischargeability rule was to curb perceived abuses. Id. This recommendation was codified in the Bankruptcy Reform Act of 1978, which rendered student loan debt nondischargeable for five years, unless excepting such debt from discharge... would impose an undue hardship on the [borrower] and the [borrower s] dependents. Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 20

30 1302, 1305 (10th Cir. 2004). In 1990, the five-year period was extended to seven years, and in 1998 it was eliminated entirely, making undue hardship the only exception to nondischargeability of student loan debts. Id. By including an undue hardship exception in the Bankruptcy Reform Act, Congress recognized that certain borrowers were not abusing the system in the way that the Bankruptcy Commission feared, but rather, were victims of circumstances that prevented them from being able to repay their obligation. In practice, the undue hardship exception brings certain student loan borrowers back into the general fresh start objective that bankruptcy is intended to provide. Congress gave no guidance as to what circumstances constitute an undue hardship. By its silence, Congress left the undue hardship determination to the wisdom of bankruptcy courts to evaluate on a case-by-case basis. In order to ameliorate the crushing student loan burden created by skyrocketing costs of higher education, Congress created income contingent repayment plans ( ICRP ), which allow borrowers to make payments based on a percentage of their annual income. For many individuals, enrollment in these plans allows them to manage debts that would otherwise be crippling. For others, however, even ICRPs do not alleviate the undue burden that repayment would impose. In some cases, an ICRP can even exasperate the undue hardship that borrowers suffer. Because ICRPs can reduce payments for borrowers to minimal amounts, in some cases eliminating payments altogether, some creditors argue that an undue hardship can never exist for a student loan borrower under an ICRP. Thus, these creditors, including Bright Futures, take the position that if a borrower qualifies for an ICRP but chooses not to enroll, they must inherently be the type of bad faith actor that originally led the Bankruptcy Commission to oppose 21

31 dischargeability of student loan debt. As Bright Futures argues here, this must especially be the case when a borrower would qualify for a zero-payment ICRP. Under this theory, creditors such as Bright Futures argue that a choice not to enroll in an ICRP should act as a per se bar to dischargeability. As Ms. Estudiante s circumstances demonstrate, Bright Futures argument fails because there are certain borrowers who are not bad actors, despite choosing not to enroll in a zeropayment ICRP. Congress intended that student loan borrowers be eligible for a fresh start when nondischareability presents an undue hardship. ICRPs do not always alleviate an existing undue hardship, nor do they provide a fresh start. This is why eligibility for an ICRP is only one factor in the undue hardship analysis. It is the proper role of bankruptcy courts, not the agencies that administer ICRPs, to determine whether a particular borrower s circumstances, considered as a whole, create an undue hardship. A. An ICRP does not provide a fresh start to Ms. Estudiante. Anyone with an eligible federal student loan can enroll in an ICRP. INCOME-DRIVEN REPAYMENT PLANS FOR FEDERAL STUDENT LOANS 3 (U.S. Dep t of Educ., 2014). No initial income eligibility requirement exists. Id. Under the ICRP option relevant here, the annual amount payable on a borrower s loan is fixed at twenty percent of his or her discretionary income. 34 C.F.R (b)(1)(ii) (2013). Discretionary income is equal to the borrower s adjusted gross income ( AGI ) minus the poverty guideline amount for his or her family size C.F.R (b)(1)(iii) (2013). Thus, if the borrower s AGI is less than or equal to the poverty guideline amount, i.e., if the borrower has no discretionary income, then the borrower s 1 Poverty guideline amounts are published annually by the United States Department of Health and Human Services pursuant to 42 U.S.C. 9902(2). 34 C.F.R (b)(1)(iii)(B) (2013). 22

32 monthly loan payment will be zero dollars. See 34 C.F.R (b) (2013). The borrower s payment is recalculated each year based upon changes in his or her AGI, the variable interest rate of the loan, updated poverty guidelines, and other factors. 34 C.F.R (b)(1)(v) (2013). Interest on the loan continues to accrue under the ICRP. 34 C.F.R (b)(3)(iv) (2013). When the accrued interest is greater than the borrower s monthly payment, the resulting unpaid interest is capitalized. Id. When the outstanding principal amount becomes ten percent larger than the original principal amount, the interest is no longer capitalized but continues to accrue. Id. Borrowers make monthly payments under the ICRP for a maximum of twenty-five years. 34 C.F.R (b); 34 C.F.R (b)(3)(iii)(A) (2013). When the loan has not been repaid at the conclusion of the twenty-five year period, the outstanding balance is cancelled. 34 C.F.R (b)(3)(iii)(D) (2013). However, if the remaining loan balance is cancelled when the borrower completes the program without full repayment, the unpaid amount... is then treated as taxable income to the borrower, which may result in a large amount of nondischargeable tax debt. In re Rutherford, 317 B.R. 865, 881 (Bankr. N.D. Ala. 2004) (citing In re Grawey, No , 2001 WL , at *4 (Bankr. C.D. Ill. Oct. 11, 2001)). 1. Congress set forth the bankruptcy code to provide a fresh start to borrowers. The central purpose of the Bankruptcy Code is to give borrowers a fresh start. In re Bogdanovich, 292 F.3d 104, 107 (2d Cir. 2002). Its passage constitutes a congressional recognition that a fresh start is the only way to provide a clear field for future effort unburdened by the existence of old debt. In re Stoltz, 315 F.3d at 94 (quoting In re Bogdanovich, 292 F.3d at 107). Consistent with congressional intent, exceptions to discharge should be strictly construed against an objecting creditor and in favor of the [borrower]. In re 23