5th Circuit: No Student Loan Discharge When IBR = $0

The Supreme Court recently finally resolved a Texas student loan discharge adversary which started in 2016. The court by denying a writ of certiorari in June of 2021 in Thelma McCoy v. U.S., 2021 WL 2519193.

This is one of those “bad facts make bad law” cases. (In the interest of full disclosure, I have issues with Brunner and Gerhardt which I have written about previously.)

The Brunner/Gerhardt test has three prongs:

  1. that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself if forced to repay her student loans;
  2. that additional circumstances exist indicating that the state of affairs described in prong one is likely to persist for a significant portion of the repayment period of the student loans, and
  3. that the debtor has made a good faith efforts to repay the loans.

District Court Memorandum Opinion and Order, Case No. 16-08007, Docket No. 79, citing In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003).

Ms. McCoy went back to college in 2000 at the age of 43. Over the next 14 years she obtained a bachelor’s degree in general studies and a master’s and Ph.D. in social work. In the process of obtaining those degrees she incurred $350,000 in student loan debt. (All of her degrees were from state universities, so I would assume that she used the student loan money not only for education-related expenses but for general living expenses, as well.) The record is not terribly clear, but it appears that she was unable to find a full-time job but was regularly employed on a part time basis, sometimes with more than one job. At the age of 62, 18 months after receiving her Ph.D. she filed Chapter 7 and then filed an adversary proceeding seeking a discharge of her student loan debt. Her total non-student loan unsecured debt was $22,500. At the time of her filing and throughout the appeal process, she was in an income based repayment plan which required a zero dollar monthly payment.

Judge Isgur did not write an opinion, but did make findings of fact and conclusions of law which he announced on the record. He found that she had not established that requiring her to pay the student loan debt would impose a current hardship because the payment was zero and all she had to do to maintain the zero payment was to submit annual statements showing that her income had not substantially increased. He also found that she had not offered any proof that she would be unable to submit those statements. No payment, no hardship. Judge Isgur made it pretty clear that this was a burden of proof case – she had the burden and she didn’t meet it.

The District Court’s opinion was more focused on whether there was a change of circumstances after the loans were incurred, citing Gerhardt for the proposition that:

“additional circumstances” encompass circumstances that impacted on the debtor’s future earning potential but which either were not present when the debtor applied for the loans or have since been exacerbated. This second aspect of the test was meant to be a demanding requirement. Thus, proving that the debtor is currently in financial straits is not enough. Instead, the debtor must specifically prove a total incapacity in the future to pay his debts for reasons not within his control. Gerhardt, at 92.

[Internal citations omitted.]

The District Court went on to state: “The timing requirement exists so that courts can examine whether ‘the debtor could have calculated [a particular circumstance] into its cost benefit analysis at the time the debtor obtained the loan.”’ Citing In re Roach, 288 B.R. 437, 445 (Bankr.E.D.La. 2003. I read the transcript of the hearing in McCoy. I am reasonably certain that Ms. McCoy did not perform any cost benefit analysis. The District Court found that the debtor failed to meet her burden of proof on that issue.

There is no mention of the “timing requirement” in Brunner. FYI, Brunner is all of two pages long.

The Fifth Circuit affirmed on the burden of proof issue saying: “McCoy could not satisfy the second prong because, although her payments are set at zero dollars per month, she had not shown additional circumstances demonstrating her inability to pay a higher monthly amount would persist. Therefore, McCoy failed to meet her burden of proof.”

Thought #1:     This is an all too common theme in student loan hardship litigation – the only witness is the debtor. The debtor is typically not qualified to offer an opinion on their medical condition and likely future implications. “My doctor said…” is hearsay and is objectionable as such. The last one of these I had (admittedly five years or so ago) we had two of his doctors lined up and the attorney who won his Social Security disability appeal. The U.S. Department of Education surrendered and gave him a hardship discharge of their loans before we filed his Chapter 7. We settled with the main non-governmental lender for very low payments for just a few years.

Thought #2:     Don’t file a bankruptcy and hardship adversary 18 months after graduating. She was 62 when she filed. The adversary was finally resolved five years later when she was 67. She might have had a better chance of getting a hardship discharge if she had waited until she was 67 and then filed.

Thought #3:     Why would a judge ever grant a hardship discharge when the debtor is in a zero dollar payment plan?  I’m thinking you would need a really sad story.

Michael Baumer


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by Michael Baumer