By: Julie Aberasturi
St. John’s University School of Law
American Bankruptcy Institute Law Review, Staff Member
Under title 11 of the United States Code (the “Bankruptcy Code”), student loan debt is typically not dischargeable, unless the failure to discharge would impose an “undue hardship” on the debtor.[1] In In re McCoy, the United States Court of Appeals for the Fifth Circuit reaffirmed the requirement that courts consider the timing of “additional circumstances” in deciding whether the undue hardship standard is met.[2] There, the debtor, Thelma McCoy, had incurred a large student loan debt in pursuit of advanced degrees, which she began to pursue in her forties.[3] Less than 18 months after earning her Ph.D. and incurring approximately $350,000 in student loan debt, McCoy filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code.[4] McCoy asserted that she qualified for this “undue hardship” exception.[5] However, the bankruptcy court found no undue hardship and therefore found that McCoy did not qualify for the exception.[6] McCoy appealed first to the district court and then to the United States Court of Appeals for the Fifth Circuit.[7] Both courts affirmed the bankruptcy court’s decision.[8] By this time, McCoy was 62 years old, less than three years away from the minimum retirement age.[9]
The Fifth Circuit previously adopted the three-prong test originally used by the Second Circuit in Brunner v. N.Y. State Higher Educ. Servs. Corp.[10] Under the Brunner test, to prove a debt imposes an “undue hardship,” a debtor must show:
(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.[11]
“Additional circumstances” in the second prong encompass only circumstances which were “either not present when the debtor applied for the loans or have since been exacerbated.”[12] McCoy argued that “at least two major additional circumstances” would likely persist because she is elderly and “suffers from severe mental and physical disabilities, which are not likely to recede or resolve.”[13] In ruling that McCoy could not satisfy the second prong of the Brunner test, the bankruptcy court explained that McCoy failed to establish additional circumstances demonstrating her inability to pay a higher monthly amount would persist.[14] On appeal, the district court noted that bankruptcy courts have considered the timing of additional circumstances[15] and that McCoy’s critical health issues (resulting from a car accident and a facial burning incident) occurred before McCoy took out the bulk of the loans and did not prevent her from obtaining a doctorate and various jobs.[16]
Ultimately, the Fifth Circuit affirmed the bankruptcy court’s decision that McCoy failed to establish additional circumstances that met the Brunner test’s second prong. The Fifth Circuit’s conclusion is consistent with its precedent. While these circumstances could encompass a broad range of occurrences, such as “illness, disability, a lack of useable job skills, or the existence of large number of dependents,”[17] bankruptcy courts have consistently held that the timing of the additional circumstances is considerable.[18] In reaching its determination regarding the second prong of the Brunner undue hardship test, the bankruptcy court followed this general line of authority, and thus, the Fifth Circuit concluded that the bankruptcy court did not clearly err in its finding.[19]
[1] See 11 U.S.C. § 523(a)(8)
[2] See McCoy v. United States (In re McCoy), 810 F.App’x 315, 318 (5th Cir. 2020).
[3] Id. at 315.
[4] McCoy v. United States, No. 3:18-CV-21, 2019 WL 1084211 (S.D. Tex. Mar. 7, 2019), aff’d sub nom. Matter of McCoy, 810 F. App’x 315 (5th Cir. 2020).
[5] Id.
[6] Id.
[7] Id.
[8] Id. at 316, 318.
[9] Id. at 317.
[10] See United States Dept. of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003) (adopting test from Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987) (per curiam)).
[11] Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987) (per curiam).
[12] McCoy, 810 F.App’x at 317 (quoting Gerhardt, 348 F.3d at 92).
[13] Id.
[14] Id.
[15] Id. (citing In re Thoms, 257 B.R. 144, 149 (Bankr. S.D.N.Y. 2001)).
[16] Id.
[17] Id. (quoting Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 386 (6th Cir. 2005)).
[18] Id.
[19] Id.