The Fifth Circuit’s Approach: Student Loan Discharge Requires both Sympathetic and Unsympathetic Debtors to Meet the Undue Hardship Burden

By: Emily N. Gault

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff Member

            Discharging student loan debt under title 11 of the United States Code (the “Bankruptcy Code”) requires a debtor to show the debt would impose “undue hardship.”[1] In In re Thomas, the United States Court of Appeals for the Fifth Circuit reaffirmed the “undue hardship” burden that requires satisfaction of the three-prong “Brunner” test established by the Second Circuit.[2] In 2012, Ms. Thomas obtained two loans to finance her first two semesters at community college. Her loans became due when she did not return for a third semester.[3] Thereafter, Ms. Thomas’s health began to significantly decline, and she was unable to maintain employment.[4]  Ms. Thomas was terminated from a job for violating company policies and later quit three other positions because her health interfered with her ability to stay on her feet.[5] Ultimately, Ms. Thomas filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code and obtained a discharge of her debts, excluding her student loan debt.[6]

             Seeking a discharge of her student loans, Ms. Thomas filed a complaint in bankruptcy court in Dallas against the Department of Education.[7] The bankruptcy court found that Ms. Thomas satisfied the first prong of the “undue hardship” test as she demonstrated she was unable to maintain a minimal standard of living.[8] However, Ms. Thomas failed to satisfy the second prong because she could not show that her present state of affairs would persist for a significant portion of the loans’ repayment period.[9] Therefore, the bankruptcy court concluded that Ms. Thomas was ineligible for a discharge of her student loans.[10] Ms. Thomas appealed the bankruptcy court’s decision first to the federal district court, then to the United States Court of Appeals for the Fifth Circuit.[11] Both courts affirmed the bankruptcy court’s decision.[12]

            Section 523(a)(8) of the Bankruptcy Code allows a discharge of student debt only if it would impose an “undue hardship” on the debtor if it were not discharged.[13] To evaluate “undue hardship” claims, the Fifth Circuit expressly adopted the three-prong test as established by the United States Court of Appeals for the Second Circuit in Brunner v. New York State Higher Education. Services Corporation.[14] Under the Brunner test a debtor must prove:

(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.[15]

             The second prong of the Brunner test has been found to be “a demanding requirement”; proving that the debtor is “currently in financial straits” is not enough.[16] By itself, the inability to pay one’s debt is insufficient because all debtors would generally meet this burden.[17] Instead, the debtor must prove “a total incapacity…in the future to pay [his] debts for reasons not within [his] control.”[18] Here, the court recognized that Ms. Thomas was a sympathetic debtor suffering from diabetic neuropathy. Nonetheless, she was still required to meet the same demanding standard set forth in the Brunner test.[19] Ms. Thomas failed to meet this demanding requirement as she failed to show circumstances out of her control resulted in a “total incapacity” to repay the debt now and in the future.[20] The court found that not only is Ms. Thomas capable of employment in sedentary work environments, but the circumstances resulting in her termination were not out of her control, but rather were in her control as she violated company policy.[21]

            This demanding requirement is consistent with Congress’s intent, as Congress had increased the threshold for discharge before settling on an “undue hardship standard.”[22] Courts have reasoned that this demanding requirement is consistent with Congress’s intent to limit bankruptcy’s use as a means of “offloading student loan debt except in the most compelling circumstances.”[23] Furthermore, the plain meaning of section 523(a)(8) demonstrates that student loans are not to be discharged unless requiring repayment would impose intolerable difficulties; the student loans must impose difficulties greater than the ordinary circumstances that might force one to seek bankruptcy relief.[24]

             Section 523(a)(8) does not address or draw any distinction between debtors who are sympathetic and those who are not.[25] Thus, a consequence of the Brunner test is sympathetic debtors are held to the same standard as debtors who are less sympathetic: both sympathetic and less sympathetic debtors are required to meet the demanding undue hardship burden.[26] As the Court in In re Thomas discussed, a different test such as the totality of circumstances that would factor in the sympathetic characteristics of a debtor’s circumstances would risk creating intolerable and inconsistent results.[27]

[1] 11 U.S.C § 523(a)(8) 2012.

[2] See Thomas v. Dept. of Educ. (In re Thomas), 931 F.3d 449, 450 (5th Cir. 2019).

[3] In re Thomas, 931 F.3d at 450.

[4] Id.

[5] Id.

[6] Id.

[7] See id.

[8] See id.

[9] See id. at 451.

[10] See id. at 453.

[11] See id.

[12] See id.

[13] 11 U.S.C. §523(a)(8) (2012).

[14] See United States Dept. of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003).

[15] See Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).

[16] See Brightful v. Pennsylvania Higher Educ. Assistance Agency, et. al. (In re Brightful), 267 F.3d 324, 328 (3d Cir. 2001).

[17] See Educational Credit Management, Corp. v. Frushour (In re Frushour), 433 F.3d 393, 399 (4th Cir. 2005).

[18] See In re Rappaport, 16 B.R. 615, 617 (Bankr. D.N.J 1981).

[19] See In re Thomas, 931 F.3d at 449, 454.

[20] See id. at 453.

[21] See id.

[22] See id.

[23] See id.

[24] See id. at 454 (citation omitted).

[25] See id.; see also 11 U.S.C §523(a)(8) (2012).

[26] See In re Thomas, 931 F.3d at 454.

[27] See id.