The student loan debt of an unemployed single mother who lives with her parents and suffers from a psychological condition is dischargeable under Bankruptcy Code Section 523(a)(8), because repayment of the loans would impose an undue hardship on her, the U.S. Court of Appeals for the Tenth Circuit held Feb. 4, affirming the bankruptcy and district courts (Educational Credit Management Corp. v. Polleys, 10th Cir., No. 02-8059, 2/4/04).

Judge Paul J. Kelly Jr. joined the majority of the other circuits that have adopted the test set forth in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987) and found that the debtor met all three requirements:

(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.

Here, Kelly said the debtor could not do much more to lower her current household living expenses, noting that she pays no rent or utilities other than her telephone. He excused any failure on her part to maximize her personal and professional resources, finding that her mental health condition made this impossible.

Kelly said there is no indication that the debtor is trying to abuse the system. To the contrary, he said she has tried unsuccessfully to use her education to maximize her income, working at accounting firms, to no avail. Circumstances beyond the debtor's control have prevented her from reaching the goal of financial independence, the judge concluded.

Kelly said the facts in the instant case indicate that the debtor is seeking to discharge her student loan debt in good faith. Even though the debtor has never made a payment on her student loans, the judge said she has demonstrated her efforts to work with her student loan lenders to negotiate repayment.

Psychological Condition.

The debtor, age 45, who has once been involuntarily committed and has attempted suicide, takes antidepressants daily and has ongoing expenses for medical and psychological care.

She has an accounting degree she paid for with student loans. She has never repaid any of these loans, which now total approximately $51,000. Repayment would require monthly payments of $420 over a 20-year period.

Educational Credit Management Corp. (ECMC), the holder of the loans, objected to the debtor's discharge of the loans and appealed the bankruptcy court and district court orders.

Undefined Term.

Section 523(a)(8) states that an educational loan is not dischargeable in bankruptcy unless "excepting such debt from discharge … will impose an undue hardship on the debtor and the debtor's dependents." The Code does not define the term "undue hardship," nor has the Tenth Circuit specified a test for determination of undue hardship. However, Kelly noted, in enacting Section 523(a)(8), Congress was primarily concerned about abusive student debtors and protecting the solvency of student loan programs (citing In re Andresen, 232 B.R. 127, 137 (B.A.P. 8th Cir. 1999)(11 BBLR 320, 4/22/99). Kelly said Section 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."

The various courts of appeals that have applied the undue hardship provision of Section 523(a)(8) have adopted two tests, Kelly said, noting that most circuits have adopted a version of the Second Circuit's three factor test set forth in Brunner. Under the Brunner analysis, if the court finds against the debtor on any of the three factors, then the inquiry ends and the debtor's student loans are not dischargeable.

In contrast, the Eighth Circuit in Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (2003), adopted a "totality of the circumstances" test for analyzing undue hardship. It provides that bankruptcy courts should consider:

• the debtor's past, present, and reasonably reliable future financial resources;

• a calculation of the debtor's and her dependent's reasonable necessary living expenses; and

• any other relevant facts and circumstances surrounding each particular bankruptcy case.

Hardship Analysis.

Applying the Brunnerfactors to the instant case, Kelly said the first factor should serve as the starting point for the undue hardship analysis because "information regarding a debtor's current financial situation generally will be concrete and readily obtainable."

Kelly said the second Brunnerfactor properly recognizes that a student loan is "viewed as a mortgage on the debtor's future (quoting Brunner). However, the judge continued, in applying the second prong, courts need not demand a "certainty of hopelessness."

Moreover, he stated, "courts should base their estimation of a debtor's prospects on specific articulable facts, not unfounded optimism"; and the examination into future circumstances should not be extended beyond the foreseeable future.

Finally, Kelly said, an examination of the debtor's good faith should focus on an analysis of the legitimacy of the basis for seeking a discharge. However, he stressed, "good faith should not be used as a means for courts to impose their own values on a debtor's life choices."

Debilitating Emotional Problems.

The bankruptcy court made extensive findings that the debtor's emotional health was fragile, noting that she "suffers from debilitating emotional problems which, though counterproductive, are obviously out of her control," Kelly said. He agreed with the lower court's findings, and concluded that the debtor's mental health problems are "at least as substantial and long lasting" as the disability of the debtor in In re Pena, 155 F.3d 1108 (9th Cir. 1998)(10 BBLR 989, 10/1/98). Pena held that the debtor's depression "prevent[ed] long-term stability" and would likely "continue to interfere with her ability to work," the judge said. Contrary to ECMC's assertion, Kelly said the relevant case law does not indicate that a permanent medical disability is any kind of prerequisite to discharging a student loan debtor (citing In re Cheesman, 25 F.3d 356 (6th Cir. 1994)(6 BBLR 609, 6/16/94)).

Judges Carlos F. Lucero and Robert H. Henry joined the opinion.

Scott M. Browning and Craig R. Welling of Rothgerber, Johnson & Lyons, Denver, appeared on brief for ECMC. Stephen R. Winship of Winship & Winship, Casper, Wyo. appeared for the debtor.