ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT

Transcription

1 A P47 Docket No October Term, 2014 IN RE SARA ESTUDIANTE Debtor, BRIGHT FUTURES EDUCATIONAL CREDIT CORP., Petitioner, V. SARA ESTUDIANTE, Respondent. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR PETITIONER Team Number P. 47 Counsel for Petitioner Oral Argument Requested

2 QUESTIONS PRESENTED I. WHETHER THE UNDUE HARDSHIP REQUIREMENT OF THE 11 U.S.C. 523(a)(8) EDUCATIONAL LOAN DISCHARGE PROVISION REQUIRES A SHOWING THAT REPAYMENT OF THE LOAN WOULD IMPOSE AN UNREASONABLE BURDEN ON THE DEBTOR AND THE DEBTOR S DEPENDENTS BASED ON THE TOTALITY OF THE CIRCUMSTANCES? II. WHETHER UNDUE HARDSHIP CAN BE FOUND WHERE THE DEBTOR FAILS TO ENROLL IN A DEPARTMENT OF EDUCATION S INCOME CONTINGENT REPAYMENT PLAN THAT WOULD REQUIRE NO MONTHLY PAYMENTS AND CANCEL THE DEBT AFTER TWENTY-FIVE YEARS? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED i TABLE OF AUTHORITIES..iv OPINIONS BELOW...ix STATEMENT OF JURISDICTION.....ix STATUTORY PROVISIONS ix STATEMENT OF THE CASE 1 SUMMARY OF ARGUMENT ARGUMENT...5 I. THE THIRTEENTH CIRCUIT ERRED WHEN IT APPLIED THE TOTALITY OF THE CIRCUMSTANCES TEST TO DETERMINE UNDUE HARDSHIP ON A DEBTOR SEEKING TO DISCHARGE STUDENT LOAN DEBT UNDER 11 U.S.C. 523 (a)(8) 5 A. The Brunner Test for Determining Undue Hardship Effectively Furthers Congress Policy and Intent Behind the Creation of the 11 U.S.C. 523(a)(8) Student Loan Exception to Discharge.7 i. The Brunner Test is Consistent with the Canons of Statutory Interpretation..7 ii. The Good Faith Requirement of the Brunner Test is Consistent with the Congressional Policy Behind Restricting the Discharge of Student Loan Debt in Bankruptcy...8 B. The Brunner Test Provides for Predictability Within the Court System..12 C. Congress Has Had Numerous Opportunities to Revise the Statutory Language of 11 U.S.C. 523(a)(8).14 D. Strict Application of the Brunner Test Effectively Works in Conjunction with a Debtor s Additional Remedial Options...15 ii

4 II. THE THIRTEENTH CIRCUIT ERRED IN DETERMINING THAT THE AVAILABILITY OF THE ICRP IS NOT RELEVANT TO THE UNDUE HARDSHIP INQUIRY A. The Undue Hardship Inquiry Regarding Discharging Student Loans in Bankruptcy Includes an ICRP Analysis B. The ICRP Defined and its Relevance within the Undue Hardship Inquiry..18 i. The ICRP Analysis when Applying the Brunner Test The First Prong Maintaining a Minimal Standard of Living The Second Prong The State of Affairs is Likely to Persist for a Significant Portion of the Repayment Period The Third Prong Good Faith Effort to Repay the Loans ii. The ICRP Analysis when Applying the Totality of the Circumstances Test...26 C. Potential Federal Income Taxation Consequences are of No Consequence D. The Ideology of the Fresh Start for Student Debtors, but at the Expense of Whom? CONCLUSION..32 APPENDIX A..I APPENDIX B..VII APPENDIX C..XXIX APPENDIX D.XXXVII APPENDIX E...XXXVIII iii

5 United States Supreme Court Cases: TABLE OF AUTHORITIES C.I.R. v. Glenshaw Glass Co., 348 U.S. 426 (1955)...19 Desert Palace, Inc. v. Costa, 539 U.S. 90 (2003)...7 Grogan v. Garner, 498 U.S. 279 (1991)...31 Sullivan v. Stroop, 496 U.S. 478, 483 (1990).8 United States Court of Appeals Cases: Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702 (8th Cir. 1981) Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987)... passim Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 400 (4th Cir. 2005)... 12, 31 Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009).. passim Educ. Credit Mgmt. Corp. v. Mosley (In re Mosley), 494 F.3d 1320 (11th Cir. 2007)... 6 Educ. Credit Mgm t Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004)...passim Faish v. Pennsylvania Higher Educ. Assistance Agency (In re Faish), 72 F.3d 298, (3d Cir. 1995), cert. denied, 116 S.Ct (1996) Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003) In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993) iv

6 Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882 (7th Cir. 2013)... 21, 24 Long v. Educ. Credit Mgmt Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003).. passim Matter of Roberson, 999 F.2d 1132 (7th Cir. 1993)... 24, 31, 32 Oyler v. Educ. Credit Mgm t Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); Tirch v. Pennsylvania Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677 (6th Cir. 2005) United States Dept. of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89 (5th Cir. 2003) , 22 United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1114 (9th Cir. 1998); United States District Court Cases: United States Dept. of Educ. v. Wallace (In re Wallace), 259 B.R. 170 (C.D. Cal. 2000) United States v. Kephart, 170 B.R. 787 (W.D.N.Y. 1994) United States Bankruptcy Appellate Panel Cases: Andresen v. Neb. Student Loan Program, Inc. (In re Andresen), 232 B.R. 127 (B.A.P. 8th Cir. 1999) Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791 (B.A.P. 1st Cir. 2010)......passim Cline v. Ill. Student Loan Assistance Ass n (In re Cline), 248 B.R. 347 (B.A.P. 8th Cir. 2000) Educ. Credit Mgmt. Corp. v. Kelly (In re Kelly), 312 B.R. 200 (B.A.P. 1st Cir. 2004).. 27 v

7 Nielsen v. Iowa Student Loan Liquidity Corp. (In re Nielsen), 518 B.R. 529 (B.A.P. 8th Cir. 2014)...27, 29 Pennsylvania Higher Educ. Assistance Agency v. Birrane (In re Birrane), 287 B.R. 490 (B.A.P. 9th Cir. 2002) , 25, 27 United States Dept. of Educ. v. Cumberworth (In re Cumberworth), 347 B.R. 652 (B.A.P. 8th Cir. 2006).27 In re Sederlund, 440 B.R. 168 (B.A.P. 8th Cir. 2010). 29 United States Bankruptcy Court Cases: Booth v. United States Dept. of Educ. et. al. (In re Booth), 410 B.R. 672 (Bankr. E.D. Wash. 2009)...32 Briscoe v. Bank of New York & New York State Higher Educ. Servs. Corp. (In re Briscoe), 16 B.R. 128 (Bankr. S.D.N.Y. 1981) Burkhead v. United States and Educ. Credit Mgmt. Corp. (In re Burkhead), 304 B.R. 560 (Bankr. D. Mass. 2004)...19 Clark v. United States Dept. of Educ. (In re Clark), 341 B.R. 238 (Bankr. N.D. Ill. 2006) 31 Grigas v. Sallie Mae Servicing Corp. (In re Grigas), 252 B.R. 866 (Bankr. D. N.H. 2000) Grove v. Educ. Credit Mgmt. Corp. (In re Grove), 323 B.R. 216 (Bankr. N.D. Ohio 2005)..passim Hicks v. Educ. Credit Mgmt. Corp. (In re Hicks), 331 B.R. 18, 26 (Bankr. D. Mass. 2005)...10 In re Campton, 405 B.R. 887 (Bankr. N.D. Ohio 2009).. 6 In re Mason, 303 B.R. 459 (Bankr. D. Idaho Johnson v. Educ. Credit Mgmt. Corp. et. al. (In re Johnson), 299 B.R. 676 (Bankr. M.D. Ga. 2003)..24 vi

8 Melton v. New York State Higher Educ. Servs. Corp. (In re Melton), 187 B.R. 98 (Bankr.W.D.N.Y.1995)...21 Storey v. Nat l Enterprise System (In re Storey), 312 B.R. 867 (Bankr. N.D. Ohio 2004)..passim Federal Statutes: 11 U.S.C. 523 (2010)..5, 8, U.S.C. 1087e (2014) C.F.R (2013)...15, 18, 19 I.R.C. 61 (2014)...19, 29 I.R.C. 108 (2013) 30 Committee Reports: H.R. Rep. No. 595, 95th Cong., 1st Sess. 133 (1977), reprinted in 1978 U.S.C.C.A.N Rep. of the Comm. on the Bankr. Laws of the U.S., H.R. Doc. No , 93d Cong., 1st Sess S. Rep. No at 32 (1976), reprinted in 1976 U.S.C.C.A.N. 4713, Treatises: William N. Eskridge, Jr., Philip P. Frickey, & Elizabeth Garrett, Cases and Materials on Legislation: Statutes and the Creation of Public Policy, 819 (3d ed. 2001)...7 Bankruptcy Law Manual 8:13 (2013) Law Review Articles: G. Michael Bedinger VI, NOTE: Time for a Fresh Look at the Undue Hardship Bankruptcy Standard for Student Debtors, 99 Iowa L. Rev (May, 2014)...13 vii

9 Andrew M. Campbell, Bankruptcy Discharge of Student Loan on Ground of Undue Hardship Under 523(a)(8)(B) of Bankruptcy Code of 1978 (11 U.S.C.A. 523(a)(8)(B)) Discharge of Student Loan, 144 A.L.R. Fed Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy, 98 Harv. L. Rev (1985)...10 Terrence L. Michael & Janie M. Phelps, Judges?!--We Don t Need No Stinking Judges!!! : The Discharge of Student Loans in Bankruptcy Cases and the Income Contingent Repayment Plan, 38 Tex. Tech L. Rev. 73 (2005) , 29 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)...11 Mark S. Zuckerberg and Amanda K. Quick, Department: Bankruptcy & Creditors Rights: Student Loans and Bankruptcy, 56 Res Gestae 328 (Oct. 2012).15 Other Secondary Sources: Black s Law Dictionary 609 (10th ed. 2014)... 8 Statutory Interpretation: General Principles and Recent Trends, CRS Report for Congress (Aug. 31, 2008), available at Chris Denhart, How The $1.2 Trillion College Debt Crisis is Crippling Students, Parents and the Economy (Aug. 7, 2013), Donghoon Lee, Household Debt and Credit: Student Debt at 15 (Federal Reserve Bank of New York, Feb. 28, 2013), 5, 14 viii

10 OPINIONS BELOW The United States Bankruptcy Court for the District of Moot entered an Order authorizing Estudiante discharge of her student loan debt with Bright Future, and in doing so, held that: (1) the discharge of student loans through bankruptcy should be reviewed through a totality of the circumstances test in order to determine whether the debtor faced sufficient undue hardship allowing for such discharge, and (2) a debtor s failure to enroll in an Income-Contingent Repayment Plan (ICRP) should not be considered in the overall analysis for determining undue hardship. (R. 6). Upon appeal by Bright Future, the district court reversed the holding of the bankruptcy court and denied the discharge of Estudiante s student loan debt, and in doing so, held that: (1) the undue hardship issue must be determined using the widely-adopted Brunner test, and (2) a debtor s failure to apply for an ICRP was per se proof of the debtor s lack of good faith to repay the debt. (R. 6 7). The United States Court of Appeals for the Thirteenth Circuit reversed the district court s decision in Case No , dated October 13, (R. 2). 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 INVOLVED The relevant statutory provisions involved in this case are listed below and reproduced in Appendices A through E: 11 U.S.C. 523 (2010); 20 U.S.C. 1087e (2014); 34 C.F.R (2013); I.R.C. 61 (2014); I.R.C. 108 (2013). ix

11 STATEMENT OF THE CASE Sara Estudiante ( Estudiante ) is a direct beneficiary of educational assistance through student loans provided by Bright Future Educational Credit Corporation ( Bright Future ). (R. 4). 1 Estudiante enrolled in Moot State College at the early age of 24 in order to obtain a bachelors degree in business administration, with financial assistance provided by Bright Future. (R. 4). Estudiante subsequently dropped out during her junior year and immediately obtained full time employment at Mallmart, where she worked for several years as a sales clerk. (R. 4). At the time Estudiante dropped out of Moot State College, she owed a total amount of $24,000 in student loans under the federal William D. Ford Direct Loan Program. (R. 4). Despite being employed full time for over twenty-three years and having the financial stability to make payments to her student loans throughout the years, Estudiante never once attempt to make such payments. (R. 4). Over the years, Estudiante allowed the interest to accrue on her loans, causing the balance to reach $48,000. (R. 5). At no point during the twenty-three years did Estudiante request a deferment, modification, or renegotiation of her student loans. (R. 5). Additionally, Estudiante never sought assistance through the Department of Education s Income-Contingent Repayment Plan ( ICRP ), despite being informed by Bright Future of her eligibility for the program. (R. 5 6). Specifically, Bright Future confirmed to Estudiante that, should she participate in the ICRP, Estudiante would not be required to make payments due to her financial circumstances. (R. 5). 1 The symbol R. will constitute a reference to the record on appeal. 1

12 After unforeseen events throughout the years, including an economic recession, medical bills, and familial obligations, Estudiante s financial circumstances unfortunately deteriorated. (R. 4 6). After missing several mortgage payments, her home was foreclosed on and Estudiante became liable for the shortfall from the foreclosure sale, to which a deficiency judgment was obtained against her. (R. 5 6). Estudiante also became delinquent in payments on charge card debts that were eventually sold to collection agencies that also unsuccessfully sought payment on the outstanding debts through collection procedures. (R. 6). Estudiante eventually filed for bankruptcy under Chapter 7 of the United States Bankruptcy Code. (R. 6). During the proceedings, Estudiante filed an adversary action against Bright Futures, seeking discharge of her student loans under 11 U.S.C. 523(a)(8). (R. 6). Upon presentation of the evidence, Bright Future argued that Estudiante had not suffered an undue hardship sufficient enough for discharge of her student loan debt. (R. 6). Additionally, Bright Future also argued that because Estudiante failed to enroll and take advantage of the ICRP, this failure should operate as a per se determination that the student loans were non-dischargeable. (R. 6). The Bankruptcy Court for the District of Moot approved the discharge by applying a totality of the circumstances test. (R. 6). Bright Future timely appealed to the district court where the court reversed the bankruptcy court s holding and denied discharge of the student loans, using the Brunner test, a test widely adopted by the circuits. (R. 6 7). The court found that Estudiante failed to prove good faith in repaying the student loans, specifically because Estudiante failed to enroll in an ICRP, and enrollment in an ICRP would not, as a matter of law, impose an undue hardship on 2

13 Estudiante. (R. 6). Estudiante subsequently appealed to the Thirteenth Circuit for the United States Court of Appeals to determine the appropriate test for discharge of student loan debt through bankruptcy. (R. 7). This appeal follows. This Court must now decide two issues: whether the Brunner test is the appropriate test to determine if the debtor has experienced undue hardship sufficient enough to discharge the student loan debt, and whether the income-contingent repayment plan is a relevant factor to considering in the undue hardship inquiry. SUMMARY OF THE ARGUMENT This Court should reverse the Thirteenth Circuit Court of Appeals and hold that the Brunner test is the appropriate test for determining undue hardship under the 11 U.S.C. 523(a)(8) exception to non-dischargeability of student loan debt. for four reasons. First, the Brunner test furthers the congressional policy and intent of the 523(a)(8) exception through proper application of the canons of statutory interpretation and furtherance of Congress intention to create a very narrow exception to nondischargeable student loan debt. Second, the Brunner test is the correct determining test for undue hardship because it provides the most predictability of all the tests due to its overwhelming approval within the circuit courts and the concrete factors the test provides. Third, the fact that Congress has had numerous opportunities to revise the statutory language and effectively lower the undue hardship standard as it is currently applied suggests that Congress approves of the statute s application through the Brunner test. Finally, this Court should uphold the strict application of the Brunner test because a debtor that cannot prove undue hardship under the test, is afforded alternative remedies through both future administrative and judicial remedies. 3

14 When determining whether a debtor should be afforded the opportunity to discharge his or her educational debt under Bankruptcy Code section 523(a)(8), the debtor has the burden to prove that excepting his or her debt from discharge would be an undue hardship. The two standards available to determine undue hardship, the Brunner test and the totality of the circumstances test, both consider the ICRP s availability and whether the debtor is eligible, which is the most generous student loan repayment program currently available. Its annual payment will never exceed twenty percent of the debtor s adjusted gross income. Moreover, depending on how severe the debtor s financial state of affairs may be, the ICRP could require no monthly payments during its twenty-five-year pay-period. As the repayment period terminates, so does the debtor s legal obligation to repay his or her student loans since the ICRP cancels any outstanding debt after twenty-five years. Estudiante did not enroll in the ICRP or take any steps to repay her student loans despite Bright Futures indicating she would not have any monthly payments imposed upon her. Instead, she is relying on the bankruptcy system to discharge her obligation. Rather than attempting to repay her loan in good faith or utilize the opportunities available, she desires to escape any liability by claiming that excepting her debt imposes an undue hardship on her, which is untrue. Furthermore, Estudiante has not demonstrated any good faith efforts in repaying Bright Futures, especially since the ICRP would not impose any adverse results. She is attempting to take advantage of the bankruptcy courts in lieu of accepting her choice to borrow money to attend college. Therefore, this Court should not discharge her debt because it would set a precedence permitting student loan debtors to evade their legal obligation at the expense of their creditors. 4

15 ARGUMENT When an appellate court is faced with determining the proper legal standard for the undue hardship requirement of 11 U.S.C. 523(a)(8), and the impact of the ICRP based on uncontested factual findings, the appellate court should review the lower court s legal conclusions de novo, and give no deference to the lower court s conclusions of law. ASM Capital, LP v. Ames Dep t Stores, Inc. (In re Ames Dep t Stores, Inc.), 582 F.3d (2d Cir. 2009). I. THE THIRTEENTH CIRCUIT ERRED WHEN IT APPLIED THE TOTALITY OF THE CIRCUMSTANCES TEST TO DETERMINE UNDUE HARDSHIP ON A DEBTOR SEEKING TO DISCHARGE STUDENT LOAN DEBT UNDER 11 U.S.C. 523(a)(8). Student loans serve as both the backbone and the crutch of the economic growth and development of the United States. 2 Due to the nature of student loans and the effect of such loans on the overall economy, the United States Bankruptcy Code has effectively deemed student loans as generally non-dischargeable, minus two very narrow exceptions. See 11 U.S.C Under 523(a)(8), a debtor may effectively discharge student loans if the debtor can prove that undue hardship will result if a court denies discharge of the loan. See 523(a)(8). Congress chose not to define undue hardship as it applies to student loans, and as such, the proper judicial test to determine whether undue hardship exists is in large debate by the circuit courts. In 1985, Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner) was one of the first courts to contemplate the intentions of Congress s use of the undue hardship 2 The default rate in 2013 for student loans was seventeen percent (17%) in 2013, not including those borrowers who have deferred their payments. Including those in deferment, the default rate for 2013 was over thirty percent (30%). Donghoon Lee, Household Debt and Credit: Student Debt at 15 (Federal Reserve Bank of New York, Feb. 28, 2013), 5

16 language. 831 F.2d 395, 396 (Bankr. S.D.N.Y. 1985). Since its creation, the Brunner test has become widely accepted by the circuits and imposes a heavy burden on the debtor to prove undue hardship. 3 However, the Eighth and Thirteenth Circuits have allowed for a more relaxed standard by applying the totality of the circumstances test for determining undue hardship. (R. 8 11); see Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, (8th Cir. 2003). Despite the chosen test, both types of courts have generally agreed that it was the intention of Congress to make student loan discharge through bankruptcy difficult. See Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1306 (10th Cir. 2004) (applying the Brunner test and noting that [s]ection 523(a)(8) was designed to remove the temptation of recent graduates to use the bankruptcy system as a low-cost method of unencumbering future earnings ); Cline v. Ill. Student Loan Assistance Ass n (In re Cline), 248 B.R. 347, 351 (B.A.P. 8th Cir. 2000) (adopting the totality of the circumstances test, but emphasizing the clarity in Congress intentions to prevent the undeserving student borrower from abusing the bankruptcy process ) (quoting Andresen v. Neb. Student Loan Program, Inc. (In re Andresen), 232 B.R. 127, 130 (B.A.P. 8th Cir. 1999)). The fundamental question at issue here is whether the Brunner test or the totality of the circumstances test should apply to determine if a debtor may discharge student loans under 523(a)(8) due to undue hardship. The Brunner test is more consistent with congressional intent and policy; allows for predictability in the court system through 3 Adopted by the Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits. See also In re Campton, 405 B.R. 887 (Bankr. N.D. Ohio 2009) (denoting a heightened standard in determining undue hardship and requiring the debtor to show exceptional circumstances which surpass the garden-variety financial hardship experienced by most debtors who seek bankruptcy relief ); In re Mason, 303 B.R. 459 (Bankr. D. Idaho 2004) (requiring a showing of more than mere tight finances ); Educ. Credit Mgmt. Corp. v. Mosley (In re Mosley), 494 F.3d 1320, 1326 (11th Cir. 2007) (citing Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324, 328 (3d Cir. 2001) (characterizing the undue hardship requirement as a certainty of hopelessness ). 6

17 the statutory language and its current acceptance by the majority of circuits; allows for congressional discretion to amend the statutory language in the future; and acts within the realm of multiple types of relief afforded to a debtor. Therefore, this Court should utilize the Brunner test when determining undue hardship under 523(a)(8). A. The Brunner Test for Determining Undue Hardship Effectively Furthers Congress Policy and Intent Behind the Creation of the 11 U.S.C. 523(a)(8) Student Loan Exception to Discharge. The Brunner test was based on the observation that Congress contemplated more than a mere garden-variety hardship when attempting to discharge student loans. In re Brunner, 831 F.2d at 396. Yet, In re Long later relaxed the standard by allowing judges more discretion in considering what facts are relevant to the undue hardship conclusion. See In re Long, 322 F.3d at The more-stringent Brunner test effectively furthers Congress policy and intent behind the inclusion of the discharge exception in general because the test is consistent with the cannons of statutory interpretation and includes an added layer of protection against wrongful student loan discharge by requiring a debtor prove good faith in attempting to repay the debt. i. The Brunner Test is Consistent With The Canons of Statutory Interpretation. When interpreting statutory language, a court should begin the analysis by looking to the plain language of the statute. William N. Eskridge, Jr., Philip P. Frickey, & Elizabeth Garrett, Cases and Materials on Legislation: Statutes and the Creation of Public Policy, 819 (3d ed. 2001). If the language of the statute is clear and unambiguous, a court need not look any further. Desert Palace, Inc. v. Costa, 539 U.S. 90, 99 (2003). However, if the language is in any way ambiguous, a court should consider other sources of authority to determine the meaning of the language, beginning 7

18 with any other helpful statutory language, case law, and administrative regulations. Statutory Interpretation: General Principles and Recent Trends, CRS Report for Congress (Aug. 31, 2008), available at Only after consulting these primary sources for a determination, a court may then look to other secondary sources to assist, such as dictionaries and legal encyclopedias. However, where a phrase in a statute appears to have become a term of art..., any attempt to break down the term into its constituent words is not apt to illuminate its meaning. Sullivan v. Stroop, 496 U.S. 478, 483 (1990) (denoting the phrase child support as an example). The statutory language of 523(a)(8) does not expressly define the term undue hardship. See 11 U.S.C. 523(a)(8). The Brunner test and the totality of the circumstances test look to differing sources to provide very different meanings. The totality of the circumstances test incorrectly refers to the Black s Law Dictionary to define undue hardship by breaking the term up and defining due as reasonable and unable as excessive or unwarranted. (R. 10). See Black s Law Dictionary 609, 1759 (10th ed. 2014). Whereas the Brunner test appropriate looks to the legislative history of the statute found within the Bankruptcy Commission report, to add meaning to the term. See Report of the Comm. on the Bankr. Laws of the U.S., H.R. Doc. No , 93d Cong., 1st Sess ii. The Good Faith Requirement of the Brunner Test is Consistent with the Congressional Policy Behind Restricting the Discharge of Student Loan Debt in Bankruptcy. The 523(a)(8) exception to the non-dischargeability of student loans in bankruptcy was originally created in response to the growing concern of borrowers 8

19 abusing the bankruptcy system by seeking bankruptcy for the main purpose of discharging student loan debt. See S. Rep. No at 32 (1976), reprinted in 1976 U.S.C.C.A.N. 4713, 4744 (including the discharge exception in the original Bankruptcy Act and subsequently adding the same language to the current Bankruptcy Code). Over the years, this concern addressed by Congress has been even more so exacerbated by student loan debt earning the title of the second largest type of consumer debt in the country second only to mortgages topping over 1.2 trillion dollars. 4 With such outstanding debt in existence, the lack of a strict standard to determine dischargeability could potentially have a crippling effect on the United States economy by allowing for an influx of borrowers seeking to discharge their student loans. The Brunner test adequately and efficiently provides a benchmark for weeding out debtors that seek to take advantage of the bankruptcy system through discharge of student loans. The first two prongs of the Brunner analysis are sufficient to require a debtor prove circumstances of a current hardship, and the persisting nature of the hardship. Brunner, 831 F.2d at 396. However, the third prong of the Brunner test is the unique characteristic that differentiates Brunner from the totality of the circumstances test and effectively acts as a buffer to the discharge exception. See id. Under the third Brunner prong, the debtor is required to show good faith by making an attempt to repay the outstanding loans prior to seeking discharge through bankruptcy. Id. This good faith inquiry, as a pre-requisite to discharge through bankruptcy, answers the question of 4 Chris Denhart, How The $1.2 Trillion College Debt Crisis is Crippling Students, Parents and the Economy (Aug. 7, 2013), (measuring student loan in at six percent of the overall national debt in 2013, potentially having the effect of slowing economic growth in general and allowing for raised interest rates). 9

20 whether the debtor is seeking discharge for the main purpose of unsaddling their financial obligations, while benefiting from the education funded by the loans. This good faith inquiry is also present in the totality of the circumstances test but bears much less weight than the inquiry through the Brunner test. See In re Long, 322 F.3d at 554 (allowing courts to consider other facts that might be pertinent to the analysis); see also Bronsdon v. Educ. Credit Mgmt. Corp. (In re Brosdon), 435 B.R. 791, 800 (B.A.P. 1st Cir. 2010) ( The debtor should not be obligated to prove a negative, that is, that he did not act in bad faith, and consequently acted in good faith. ); Hicks v. Educ. Credit Mgmt. Corp. (In re Hicks), 331 B.R. 18, 26 (Bankr. D. Mass. 2005) (noting that none of the factors in the totality of the circumstances test are singly dispositive of a determination). Under Brunner, a debtor s lack of showing good faith will effectively dismiss an adversary action to discharge the student loans. Brunner, 831 F.2d at 396. Whereas, the good faith inquiry under the totality of the circumstances test is seen as merely a factor in a multitude of other factors to be considered in the overall analysis. See In re Long, 322 F.3d at 554; Bronsdon, 435 B.R. at 800; In re Hicks, 331 B.R. at 26. The Brunner good faith element effectively balances the debtor s interest in a fresh start through bankruptcy, with the collective interests of the government and credit lenders. 5 See In re Long, 322 F.3d at 554. The element s dispositive nature encourages borrowers to work with their financial lenders prior to seeking discharge of the student loans through bankruptcy in order to exhaust their administrative remedies. See In re Brunner, 831 F.2d at 396. To suggest that this good faith inquiry is only one of several factors, rather than a required element, would effectively render the debtor s 5 The fresh start policy of the Bankruptcy Code acts to properly discharge certain debts that might inhibit a debtor s productivity if the debtor is given a second chance through bankruptcy. See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy, 98 HARV. L. REV. 1393, 1420 (1985). 10

21 administrative options as obsolete and would disrupt the procedures our judicial system hinges on. In general, under Brunner, the good faith requirement effectively filters out debtors attempting to abuse the bankruptcy system by asking what the dominant purpose is in the debtor s attempt to discharge this special type of debt. See Robert F. Salvin, Student Loans, Bankruptcy, and the Fresh Start Policy: Must Debtors Be Impoverished to Discharge Educational Loans?, 71 Tul. L. Rev. 139, 147 (1996) (noting the growing concerns behind students filing bankruptcy for the lone purpose of casting aside financial aid debt). The case before this Court specifically is a classic example of why the Brunner test is the best-suited test for determining undue hardship under 523 (a)(8). Here, prior to Estudiante filing for bankruptcy and discharge of her student loan obligations, Bright Futures offered Estudiante the opportunity to participate in an ICRP, to which she would make no payments on her loans, so long as her financial circumstances did not improve. (R. 5). Estudiante opted not to participate in this program, but rather continued to make no payments while becoming further and further delinquent, and allowing the interest to accrue on the loans at a rate of about $1,700 annually. (R. 5). Additionally, Estudiante never applied for any type of deferment, modification, consolidation, or renegotiation in general of her loans through Bright Futures. (R. 5). Overall, from the date in which Estudiante dropped out of school to work full time as a sales clerk at Mall Mart, up until when Estudiante filed this adversarial action against Bright Futures, Estudiante never once made a single payment on her loans nor did Estudiante act in a manner that would be considered a good faith attempt to satisfy the outstanding obligations. (R. 4 6). Therefore, because Estudiante is unable to show even an attempt 11

22 at satisfying her debts prior to seeking discharge, she should not be eligible for discharge of the loans. Judge Nicotera eloquently stated in the Thirteenth Circuit s dissenting opinion, One trillion dollars is an enormous sum, and if the students who benefitted from an education bought with borrowed funds do not repay their loans, that burden ill fall on the taxpayers a one trillion dollar debt that taxpayers, or the economy for that matter, cannot handle. (R. 14). As such, in order to ensure that every debtor in a similar position of Estudiante does not attempt to merely walk away from their student loans, and because the Brunner test s requirement of good faith is reasonable and necessary to ensure such requests are being properly filtered, this Court should hold that the Brunner test is the most appropriate test for determining undue hardship under 523(a)(8). B. The Brunner Test Provides for Predictability Within the Court System. Over time, a multitude of bankruptcy courts have faced the question of which test to apply to determine undue hardship in 523(a)(8). The court in Faish v. Pennsylvania Higher Educ. Assistance Agency (In re Faish), remarked that this particular area of law was one with a considerable state of confusion. 72 F.3d 298, (3d Cir. 1995), cert. denied, 116 S.Ct (1996) (adopting the Brunner test). Following the creation of the exception, a number of courts of appeals also addressed the undue hardship issue, with a majority of the courts explicitly adopting the Brunner test. See In re Faish, 72 F.3d at 300; Educ. Credit Mgmt. Corp v. Frushour (In re Frushour), 433 F.3d 393, 400 (4th Cir. 2005); United States Dep t of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003); Oyler v. Educ. Credit Mgm t Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005); In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993); United Student 12

23 Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1114 (9th Cir. 1998); Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004); Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003). Due to the wide acceptance of the Brunner test in the circuit courts already, approval of the test by this Court would allow for continued predictability throughout the lower courts. Further, while contemplating which test to apply, the New Hampshire federal district court in Grigas v. Sallie Mae Servicing Corp. (In re Grigas) ultimately choose the Brunner test because it provided concrete factors that ultimately increased predictability in its holdings. 252 B.R. 866, 874 n.8 (Bankr. D. N.H. 2000). Specifically, the Brunner test focuses on three inquires: (R ). The first prong simply requires that the debtor make some sacrifice to repay the loans. However if repayment would drive the debtor below a minimal standard of living, then the first prong of the undue hardship test is met. The second prong simply requires a showing that the debtor s inability to pay is not of short duration. Rather the debtor must show that the condition will persist for a significant portion of the repayment period. The final prong focuses on whether it is appropriate to impose further economic hardship on the debtor. The debtor must show that she has made a good faith effort to repay the loans. Determining undue hardship under a totality of the circumstances test allows courts to potentially place improper weight on certain factors, such as religious tithing, for instance. G. Michael Bedinger VI, NOTE: Time for a Fresh Look at the Undue Hardship Bankruptcy Standard for Student Debtors, 99 Iowa L. Rev (May, 2014). The totality of the circumstances test also does little to discourage the judiciary from treating similar debtors similarly, whereas the Brunner test allows a court a more 13

24 objective look at the circumstances. See Educ. Credit Mgm t Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004). C. Congress Has Had Numerous Opportunities to Revise the Statutory Language of 11 U.S.C. 523(a)(8) Judge Nicotera argued in the circuit court s dissent that [c]hanges to the nature of educational loan debt and amendments in 11 U.S.C. 523(a)(8) make the strict, multifaceted approach of Brunner a better test for discharge than when initially conceived. (R. 15). This language was in direct response to the majority opinion s statement that Brunner was a relic that should be discarded. (R. 8). To the contrary, changes to the educational loan system and amendments to the discharge exception, reinforce the necessity for the Brunner test and Congress approval of the test. The last amendment made by Congress to 523(a)(8) was in 2005 and the amendment did not change or define the undue hardship language nor did it alter the majority approach of Brunner. Bankruptcy Law Manual 8:13 (2013). The 2005 amendment was then followed by the recession of 2008, which effectively changed the nation s economic circumstances, including the ever-increasing and outstanding student loan debt. See Donghoon Lee, Household Debt and Credit: Student Debt at 15 (Federal Reserve Bank of New York, Feb. 28, 2013), However, despite the recession and other evolving circumstances over the years, Congress has not once attempted to define or revise the undue hardship language in 523(a)(8), suggesting that Congress is happy with the Brunner test as the dominant test to determine undue hardship. 14

25 Had Congress felt that the Brunner test was too high of a standard, they would have merely amended the statutory language. Yet, it has not done so. In fact, as it applies to the student debt crisis, Congress has taken other steps to lighten the load for student loan borrowers, for instance, by lowering interest rates on subsidized federal undergraduate loans in See Mark S. Zuckerberg and Amanda K. Quick, Department: Bankruptcy & Creditors Rights: Student Loans and Bankruptcy, 56 Res Gestae 328 (Oct. 2012). D. Strict Application of the Brunner Test Effectively Works in Conjunction With A Debtor s Additional Remedial Options. Should a debtor fail to prove undue hardship under 523(a)(8), the debtor will not be left without options. Generally, a debtor may seek administrative relief through available income-based repayment plans (IBRP) and income-contingent repayment plans (ICRP), as well as consolidation options. See 34 C.F.R (a) & In this case, Estudiante received her financial assistance through the William D. Ford Federal Direct Loan Program. (R. 4). This program in particular offers a number of options, including a standard repayment plan, extended and graduated plans, and access to an ICRP or IBRP. In this case, Bright Futures timely informed Estudiante of her eligibility for the ICRP and, under the program, her payments would be nothing. (R. 5). Yet despite Estudiante s eligibility to participate in the ICRP and her zero payment obligation under the program, Estudiante chose not to participate in the program. (R. 5). In addition to administrative relief, a debtor that has been denied undue hardship under 523(a)(8) is not exhausted of judicial relief once the action is dismissed. A determination of undue hardship may be dismissed without prejudice by the bankruptcy court, allowing the debtor to again seek relief through the court system should the 15

26 debtor s financial circumstances change further deteriorate in the future. Andrew M. Campbell, Bankruptcy Discharge of Student Loan on Ground of Undue Hardship Under 523(a)(8)(B) of Bankruptcy Code of 1978 (11 U.S.C.A. 523(a)(8)(B)) Discharge of Student Loan, 144 A.L.R. Fed. 1. In this case, should Estudiante fail to prove undue hardship, she could seek her administrative relief through the ICRP, allowing her virtually no payments unless her financial circumstances improve, in which case her payments would adjust accordingly. (R. 14). See infra discussion Part II. Additionally, a dismissal of this action without prejudice would effectively allow Estudiante the opportunity to again seek discharge of her student loans through 523(a)(8), should Estudiante s financial circumstances deteriorate in the future. II. THE THIRTEENTH CIRCUIT ERRED IN DETERMINING THAT THE AVAILABILITY OF THE ICRP IS NOT RELEVANT TO THE UNDUE HARDSHIP INQUIRY. The Thirteenth Circuit erred in finding undue hardship when Estudiante failed to enroll in the ICRP requiring no monthly payments for twenty-five years resulting in the cancelation of her debt. Undue hardship has not been defined under Bankruptcy Code section 523(a)(8). See In re Bronsdon, 435 B.R. at 797 (stating that the Bankruptcy Code has not defined undue hardship ). However, there are essentially two means the courts use to determine undue hardship: the Brunner test and the totality of the circumstances test. See id. (providing that there is no particular test to determine whether student loans should be discharged); see also In re Grove, 323 B.R. 216, 223 (Bankr. N.D. Ohio 2005) (explaining that courts created multiple tests to determine the existence of undue hardship). Nevertheless, the Brunner test is clearly the predominant method used to evaluate undue hardship since most circuits have adopted such. See In re 16

27 Bronsdon, 435 B.R. at 797 (illustrating that nine circuit courts of appeal have adopted the Brunner test to establish undue hardship). In determining undue hardship, one should contemplate the availability and eligibility of enrolling in the ICRP as a means to reduce, minimize, or limit one s student loan obligations. Both the Brunner test and the totality of the circumstances test consider the ICRP as a factor for undue hardship. Therefore, the dissenting opinion was correct when it stated that the availability of the ICRP precludes a finding of undue hardship despite triggering potential federal income taxation issues because both tests account for the ICRP s accessibility and practicality while ensuring debtors do not abuse the Bankruptcy Code. A. The Undue Hardship Inquiry Regarding Discharging Student Loans in Bankruptcy Includes an ICRP Analysis. Bankruptcy Code section 523(a)(8) will not permit debtors to discharge student loans unless excepting such debt from discharge... would impose an undue hardship on the debtor and the debtor s dependents. 11 U.S.C. 523(a)(8). Procedurally, Bright Futures must establish that Estudiante s debt is the type typically excepted from discharged under Bankruptcy Code section 523(a)(8). See In re Bronsdon, 435 B.R. at 796 ( The creditor bears the initial burden of establishing that the debt is of the type excepted from discharge under [section] 523(a)(8). ). Bright Futures loaned Estudiante money to attend college, i.e., a student loan, thus, the debt is typically excepted from discharge. (R. 4 5). Currently, the burden shifted to Estudiante, who must prove that excepting her student loans from discharge imposes an undue hardship on her and her dependents. See In re Bronsdon, 435 B.R. at (clarifying that once the burden shifts to the debtor, 17

28 he or she must prove undue hardship by a preponderance of the evidence). However, if a debtor is capable of earning sufficient income to make payments by utilizing the various special opportunities available, e.g., enrolling in the ICRP, then the student loan should not be discharged. Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 781 (8th Cir. 2009). Moreover, legislative history provides that [E]ducational loans are different [from] most loans. They are made without business considerations, without security, without cosigners, and relying [sic] for repayment solely on the debtor s future increased income resulting from the education. In this sense, the loan is viewed as a mortgage on the debtor s future. In addition, there have been abuses of the system by those seeking freedom from educational debts without ever attempting to repay. H.R. Rep. No. 595, 95th Cong., 1st Sess. 133 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, Further, there can never be a finding of undue hardship under [section] 523(a)(8) if loan consolidation under the [ICRP] is available... [thus,] the repayment formula of the [ICRP] incorporates each debtor s ability to pay, making the undue hardship provision of [section] 523(a)(8) obsolete. In re Grove, 323 B.R. at 227. B. The ICRP Defined and its Relevance within the Undue Hardship Inquiry. The ICRP is a repayment plan in which a debtor s monthly payment amount is mostly based on the total amount of the debtor s loans, family size, and adjusted gross income. 34 C.F.R (b). The annual amount payable will never exceed twenty percent of the debtor s discretionary income, and the repayment period is limited to twenty-five years. 34 C.F.R (b)(1)(ii) (b)(3)(iii)(a). Discretionary income is the difference between the debtor s adjusted gross income and the poverty guideline, which is annually published by the United States Department of Health and Human Services. 34 C.F.R (b)(1)(iii). Each year, the Secretary recalculates the 18

29 [debtor s] annual payment amount based on changes in the [debtor s] adjusted gross income, the variable interest rate, the income percentage factors... and the [Health and Human Services] Poverty Guidelines, and may adjust the debtor s repayment obligations based on special circumstances; e.g., loss of employment. 34 C.F.R (b)(1)(v) (b)(3)(ii). If the monthly payment is between $0 and $5.00, the monthly payment is $5.00; however, if the debtor s income is less than or equal to the poverty line, the monthly payment is $0. 34 C.F.R (b)(1)(vi) (emphasis added); see In re Burkhead, 304 B.R. 560, 564 (Bankr. D. Mass. 2004). The Secretary will cancel any outstanding balance if the debtor has not repaid the loan at the end of twenty-five years. 34 C.F.R (b)(3)(iii)(D). This cancellation has the potential to trigger federal income 6 taxation issues. See I.R.C. 61(a)(12) (2014) (defining gross income as income from whatever source, including discharge of indebtedness). Upon default, the Secretary may require any debtor to repay their student loan via the ICRP. 20 U.S.C. 1087e(d)(5)(B) (2014); see Jesperson, 571 F.3d at 781 (expressing how the ICRP is a suitable manner for debtors to avoid undue hardship while repaying their loans). Courts should not be concerned about a debtor s future income regarding one s eligibility for the ICRP because this repayment program accounts for declines, regardless of any outstanding educational loan balance, which normally avoids undue hardship. Jesperson, 571 F.3d at 783. [T]he [ICRP] only requires a debtor to pay what they can and when they are able. In re Storey, 312 B.R. 867, 875 (Bankr. N.D. Ohio 2004). Hence, a good faith debtor s effort to reduce his or her monthly payments by qualifying 6 C.I.R. v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (defining income as any accession to wealth that has been clearly realized in which the taxpayer has complete control). 19

30 for the ICRP is a relevant factor when determining undue hardship. Jesperson, 571 F.3d at 784. i. The ICRP Analysis when Applying the Brunner Test. The Brunner test is the main standard used to determine the existence of undue hardship, which requires proving the following three prongs: (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. Brunner, 831 F.2d at 396. The Brunner test is practical since it does not subject a debtor to live in poverty while attempting to discharge the student loans; rather it adheres to a debtor s needs. In re Grove, 323 B.R. at 223. Simultaneously, the objective application of the Brunner standard safeguards the financial integrity of the student loan program by not permitting debtors who have obtained the substantial benefits of an education funded by taxpayer dollars to dismiss their obligation merely because repayment of the borrowed funds would require some major personal and financial sacrifices. Id. at The First Prong Maintaining a Minimal Standard of Living. In this case, the first prong 7 carries significant weight when evaluating the ICRP because Estudiante should not be forced into poverty in order to satisfy her legal obligation; 8 however, she is not permitted to financially designate her funds to ensure Bright Futures suffers either. See In re Grove, 323 B.R. at 223 (requiring debtors to not financially allocate their resources to the detriment of their student loan creditors); see 7 In re Grove, 323 B.R. at 224 (analyzing the debtor s income and necessary expenses to meet his or her basic needs). 8 Polleys, 356 F.3d at 1309 ( This evaluation necessarily entails an analysis of all relevant factors, including the health of the debtor and any of his dependents and the debtor s education and skill level. ). 20

31 also In re Melton, 187 B.R. 98, 102 (Bankr. W.D.N.Y. 1995) ( [W]hether a debtor chooses privation for good reasons or for bad, [section] 523(a)(8) does not permit [t]his choice to be exalted at the expense of an educational loan lender or guarantor. ). By enrolling in the ICRP, zero dollars are being removed from her income for twenty-five years. If no monetary value is required per month, it is impossible to negatively affect her minimal standard of living. Therefore, Estudiante fails the first prong if she is forced to repay her loans because anything less nothing remains the same. 2. The Second Prong The State of Affairs is Likely to Persist for a Significant Portion of the Repayment Period. Since the ICRP s monthly payment is directly related to a debtor s income, the second prong plays a stronger role in determining the existence of undue hardship. See In re Storey, 312 B.R. at 871 (representing the undue hardship aspect of section 523(a)(8)). The principal driving this part of the Brunner test is as follows: (1) a debtor s current unfortunate financial state must be externally caused; and (2) the debtor must have exhausted all opportunities to improve their financial situation. Id. at 872. Essentially, there needs to be an involuntary inability to improve one s financial circumstances. Id. (experiencing hardship must actually be undue rather than the garden variety financial hardship a debtor seeks to avoid through bankruptcy). Moreover, instead of a debtor relying on discharging his or her debt through bankruptcy when it is impossible to repay the student loans, there should be a mandatory enrollment in the ICRP. Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882, 886 (7th Cir. 2013). The main reason why Estudiante is in her current predicament stems from her husband s illness and unfortunate death. (R. 4). She was forced to drop out of college and tend to her two young children while maintaining the family s expenses. (R. 4). 21