By: Kayla Mistretta
St. John’s University School of Law
American Bankruptcy Institute Law Review, Staff Member
Student loan debts are ordinarily non-dischargeable in a bankruptcy proceeding. Under Title 11 of the United States Code (the “Bankruptcy Code”), however, a student loan may be discharged if the debtor can prove that excepting the debt from discharge would cause “undue hardship” on the student or her dependents. The United States Court of Appeals for the First Circuit in Schatz v. Access Grp., Inc. (In re Schatz) held that consideration of exempt assets cannot be given dispositive weight in a bankruptcy court’s undue hardship analysis. Thus, the court held that the Bankruptcy Court for the District of Massachusetts, while free to apply the totality of the circumstances test, misapplied the test to the extent its decision factored in the exempt equity in the debtor’s home.
Under the Bankruptcy Code and state law, certain property of an individual may be exempt. If properly exempted, the debtor may retain the property and such property shall be “immunized against liability for prebankruptcy debts.” One such exemption is the “homestead exemption,” which exists under both federal and state law, and allows a debtor to retain a stated amount of interest in property that is used as a residence. In this instance, the debtor, Schatz, filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code, and elected to claim the homestead exemption under the more generous Massachusetts state law, which allows an owner who “occupies real property as her residence to place her equity in the residence, generally up to a maximum of $500,000, beyond the reach of creditors.” Schatz also sought a discharge of her student loan debt, claiming that to repay her outstanding student loan obligations, which totaled approximately $110,000, would cause her undue hardship because she had a monthly income deficit of $76.11. The bankruptcy court, applying the totality of the circumstances test, denied the request to discharge Schatz’s student loans, after it concluded that the “existence of substantial equity in the debtor’s property that can be used to pay these student loans in full” was dispositive.
The totality of the circumstances test is “fact-intensive.” When applying the test, a bankruptcy court must consider: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable, necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.” While the third prong of this analysis requires bankruptcy courts to analyze the individual facts of each case, exempt assets are not among the factors considered by First Circuit courts. Rather, a bankruptcy court “should consider all relevant evidence–the debtor’s income and expenses, the debtor’s health, age, education, number of dependents and other personal or family circumstances, the amount of the monthly payment required . . . and the debtor’s ability to find a higher-paying job, move or cut living expenses.” In the First Circuit, under a proper application of the totality of the circumstances test, “a debtor who might have a weak argument for discharge on one factor, but nonetheless suffer undue hardship because of another factor,” may still be able to obtain a discharge. To that end, it is true that Schatz may have had a weaker argument for discharge because the exempt equity in her home exceeded the amount of her outstanding student loans. However, according to the First Circuit, the bankruptcy court should have considered other factors affecting Schatz’s ability to pay back her student loans overtime. Regardless of the exempt equity in her home, Schatz may nevertheless suffer undue hardship warranting discharge of her student loan debt.
The Supreme Court has noted that when a debtor invokes a statutory exemption, a court cannot refuse to honor the exemption without a statutory basis for doing so. Under section 522 of the Bankruptcy Code, there is a statutory basis for holding exempted property liable to satisfy a student loan debt that was obtained fraudulently. Here, however, there is no allegation that Schatz obtained her student loans through fraud or engaged in any other misconduct, and the Supreme Court has held that courts may not create additional exceptions sua sponte. Therefore, according to the First Circuit, no basis existed to refuse to respect Schatz’s homestead exemption. Accordingly, the bankruptcy court erroneously concluded that the existence of equity in the exempt home was dipositive and failed to analyze the relevant factors, particularly Schatz’s future earning capacity and the impact of her health conditions on same.
Ultimately, the holding of the Court in Schatz v. Access Grp., Inc. (In re Schatz) highlights that a bankruptcy court may not “short-circuit” an undue hardship analysis and must provide student loan debtors with the full consideration they deserve. Under the totality of the circumstances test, a bankruptcy court must consider the whole picture and may grant a discharge when it is equitable to do so. In the First Circuit, a court should not factor in the value of exempt property in its analysis. In contrast, other circuits allow consideration of a “[l]ack of assets, whether or not exempt, which could be used to pay the loan.” However, these circuits apply a completely different test to assess undue hardship, the Brunner Test. Moreover, these courts still note that discharge of student loans depends on the full and unique circumstances of each debtor. If requiring the forfeiture of an exempt asset would “exacerbate a situation of undue hardship” for an individual debtor, that debtor should still receive a discharge of student loan debt. Thus, circuit courts appear to unanimously hold that exempt assets may never be given dispositive weight, no matter what test is applied when analyzing undue hardship.
 Ayele v. Educ. Credit Mgmt. Corp. (In re Ayele), 490 B.R. 460, 462 (D. Mass. 2013); see also Collier on Bankruptcy, App. Pt. 44, 1.4.5 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009), available at LEXIS, Collier on Bankruptcy P 1.4.5 (stating, current bankruptcy law makes student loans non-dischargeable in all chapters).
 11 U.S.C. § 523(a)(8) (2012).
 Schatz v. Access Grp., Inc. (In re Schatz), 602 B.R. 411, 428–29 (1st Cir. 2019).
 Id. at 422 (“In the absence of controlling authority in this Circuit, the Bankruptcy Court was free [to] choose its own approach to evaluate undue hardship.”) (alteration in original) (internal citations and quotations omitted).
 Id. at 428. Subsequently, the First Circuit vacated the Bankruptcy Court’s decision and remanded the case for a proper analysis under the totality of the circumstances test. Id. at 429.
 11 U.S.C. § 522(c) (2012).
 In re Schatz, 602 B.R. at 425 (internal citations and quotations omitted).
 Id. at 423; 11 U.S.C. § 522(d)(1) (2012); Mass. Gen. Laws ch. 188 §§ 1, et seq. (2010). A debtor may elect available exemptions under applicable state law rather than federal law. In re Schatz, 602 B.R. at 423.
 In re Schatz, 602 B.R. at 424 (internal citations and quotations omitted); Mass. Gen. Laws ch. 188 §§ 1, et seq. (2010). In contrast to Massachusetts state law, federal law only allows a debtor to retain up to $15,000 of interest in the debtor’s residential property. See 11 U.S.C. § 522(d)(1) (2012).
 In re Schatz, 602 B.R. at 413–15.
 Id. at 417–18. The approximate equity in the debtor’s residence was $125,000. Id. However, this amount falls within the limits of the state’s homestead exemption. See Mass. Gen. Laws ch. 188 §§ 1, et seq. (2010).
 In re Schatz, 602 B.R. at 426.
 Id. at 422 (internal citations and quotations omitted).
 Id. at 426.
 Id. at 423 (quoting In re Hicks, 332 B.R. 18, 31 (Bankr. D. Mass. 2005)).
 Ben Wallen, One Standard to Rule Them All: An Argument for Consistency in Education Debt Discharge in Bankruptcy Proceedings, 16 Hous. Bus. L.J. 232, 243 (2016).
 See In re Schatz, 602 B.R. at 427 (noting, “the consideration of home equity may be proper under certain circumstances”). But see id. (stating the availability of exempt home equity is not a “determinative factor”).
 Id. at 428.
 See id. at 428–29. Consequently, the Court remanded the case for a “proper application of the totality of the circumstances test that yield sufficient findings of fact and accords them an appropriate weight.” Id. at 429.
 Law v. Siegel, 571 U.S. 415, 424 (2014).
 11 U.S.C. § 522 (c)(4) (2012).
 Law, 571 U.S. at 424.
 See In re Schatz, 602 B.R. at 426 (“[B]y explicitly permitting exempt assets to be liable for pre-petition student loan debt incurred through fraud…Congress did not intend to allow creditors to access exempt assets for payment of pre-petition student loan debt in the absence of such debtor fraud.”).
 Id. at 428.
 Id. at 429. The Complaint alleged that Schatz suffered from multiple medical conditions, “including lasting ill effects from a brain injury, [and] chronic kidney disease,” which hindered her ability to work, and that she was unable to find a well-paying job in the legal field after graduating from law school. Id. at 414–15.
 See In re Schatz, 602 B.R. at 428.
 Educ. Credit Mgmt. Corp. v. Nys (In re Nys), 466 F.3d 938, 947 (9th Cir. 2006); see also In re Armesto, 298 B.R. 45, 48 (Bankr. W.D.N.Y. 2003); In re Hamilton, No. 07–68258–MHM, 2009 WL 6499258, at *2 (Bankr. N.D. Ga. 2009).
 See cases cited supra note 27. The Brunner test requires proof “(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 v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987).
 See In re Armesto, 298 B.R. at 48.