By Joseph Pack and Jessey Krehl (July 14, 2021, 4:51 PM EDT) for Law 360
School’s out for summer, and the U.S. Supreme Court is too, but not before denying certiorari in the case of McCoy v. United States.
On June 21, the Supreme Court dealt a blow to advocates of student loan discharges in bankruptcy with the McCoy cert denial. With federal student loan forbearance set to expire at the end of September, many hoped that the high court would weigh in on the issue to provide, if not justice, at the very least uniformity for the millions of Americans who currently have these loans.
With this uncertain status quo maintained, practitioners and debtors alike should remain acutely aware of the legal standards governing student loan discharge. Debtors need to determine what repayment options are available and make good faith efforts to make those payments, even if repayment of the loans seems hopeless — because evaluating such options and making such efforts may actually be their best hope for a discharge.
Multiple Choice: One Standard, Two Tests
At the heart of the case is the U.S. Court of Appeals for the Fifth Circuit decision in which a Texas woman was denied discharge of her student loans. The legal standard at issue is, ostensibly, the same for all bankrupt student loan borrowers: whether a denial of discharge would impose an “undue hardship” on the debtor under Bankruptcy Code Section 523(a)(8).
What precisely this means and who precisely meets this standard varies from court to court and is subject to restrictions that critics cite as oppressive to borrowers and exceeding Congress’ intent.
For example, in the U.S. Court of Appeals for the Eighth Circuit — covering the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota — and most of the jurisdictions in the First Circuit — covering Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico — the standard is the “totality of the circumstances.”
Under this approach, the courts ask, as spelled out by the Eighth Circuit in 2003 in In re: Long, whether the debtor’s “reasonable future financial resources will sufficiently cover payment of the student loan debt while still allowing for a minimal standard of living” by looking at all of the facts and circumstances surrounding an individual debtor.
On the other side of the divide, the remaining federal circuits, including the Fifth Circuit, from which McCoy appealed to the Supreme Court, use the so-called Brunner test.
In 1987, in Brunner v. New York State Higher Education Services Corp., the U.S. Court of Appeals for the Second Circuit established a test that asks three questions: (1) whether, based on current income and expenses, the debtor can maintain a minimal standard of living for themselves and their dependents, (2) whether additional or new circumstances exist that indicate this hardship will persist for a significant portion of the repayment period, and (3) whether the debtor has made good faith efforts to repay the loans.
The most extreme of these Brunner courts go so far as to require debtors to prove, under the second prong, that circumstances exist that would “strip [the debtor] of all that makes life worth living” as noted by the U.S. Bankruptcy Court for the Northern District of Indiana in the 1987 In re: Courtney decision.
If a debtor fails on any of these three prongs, a discharge is categorically unavailable in these Brunner circuits. For example, even a debtor who suffers incredible hardship and has been stripped of “all that makes life worth living” will be forced to continue repayment if they, in the past, have not made good faith efforts to pay their loans while living this stripped-down life.
McCoy v. U.S.
Certiorari was requested in the McCoy case, with the hope that the Supreme Court could resolve the divide facing student loan debtors. The case turned on whether McCoy had a total incapacity to repay her student loans, which is a sub-requirement of Brunner’s second prong in the Fifth Circuit.
Thelma McCoy, a 62-year-old woman who had suffered a litany of health complications and disabilities after a car accident with a drunk driver in 2007, relied heavily on student loans to complete her degree. She tried on many occasions to obtain employment during and after graduation — and according to the petition filed with the Supreme Court, she had applied for 185 jobs between 2012 and 2017, both inside and outside her field — but was unable to find steady, full-time employment.
At the trial before the bankruptcy court regarding McCoy’s discharge of her student loans, the bankruptcy court noted that she had recently gotten some part-time employment, which the court believed meant it was possible she could find better employment at some point in the future. It also noted that income-driven repayment plans are available, meaning that repayment would not deprive the debtor of a minimum standard of living.
On appeal before the district court, the court noted that the Brunner test required the debtor to demonstrate total incapacity due to circumstances that were not present when she applied for loans — or ones that have since been exacerbated. Because McCoy was already suffering from her disabilities and troubled employment prospects at the time she applied for her loans, she was unable to show that her inability to pay was a total incapacity caused by new circumstances.
The McCoy case is very similar to the 2013 case of In re: Grimes before the U.S. Bankruptcy Court for the District of Nebraska.
There, Jeneane Grimes, a 66-year-old debtor who suffered from poor health and an unfruitful job search after loss of employment, was granted a discharge of student loans. The bankruptcy court there noted that the availability of an income-driven repayment plan was merely one factor to consider, as opposed to a disqualifying fact. What is the difference between McCoy and Grimes, then?
Grimes took place in Nebraska, where the Eighth Circuit’s totality test is the law of the land. This underscores the fact that McCoy’s case was the perfect vehicle for the Supreme Court to resolve this divide, but it elected not to do so.
Where This Leaves Us
Congress created the exception to discharge of student loan debts in bankruptcy to curtail possible abuses of the system. Aware that they should not go too far, however, they built in the undue hardship standard to ensure that these debts could still be discharged, where appropriate.
In asking whether a debtor is suffering undue hardship, the totality test is far superior because the degree of hardship should look at all facts and circumstances, not just new ones, and by its very nature does not lend itself to strict analysis that cannot be flexibly applied to an individual.
Think of the most extreme hardship imaginable and the worst possible circumstances for a debtor with student loans. In Brunner jurisdictions, if that individual under these terrible circumstances fails just one prong, this court-created doctrine in essence says that their hardship is due. Evidently, if they don’t pass the test with a clean sweep, they had it coming.
The unwillingness of these Brunner courts to look at facts and circumstances outside their narrow, court-created schema is not only an inappropriate exercise of judicial power that is objectionable as an academic matter, but indeed it is demonstrably harming student loan debtors seeking the fresh start that bankruptcy brings to nearly all other forms of debt.
Regardless of which test the Supreme Court would ultimately prefer, however, the lack of ubiquity is a problem. The Supreme Court’s denial of certiorari here means that if we take two otherwise identical students — same college, same job, same debt, same hardship —but one moved to North Dakota after school and the other moved to Montana, the North Dakota student has a chance at resolving their student debt in bankruptcy while the Montana student has functionally none. It was this inconsistency the court had an opportunity to resolve, and it failed to do so.
For now, it seems, the best course of action for practitioners is to take advantage of the totality test where it is the law of the land and to continue to push for a “Brunner-lite” test where the totality test is unavailable. Of particular note, student loan debtors and those advising them need to be acutely aware of Brunner’s three prongs, given that failure of any one can be damning.
Student loan debtors should work to create a record of their good faith efforts to make payment or rework their student loan debt, as this is a necessary element in these circuits. It may seem strange to a would-be debtor that they should treat their student loans more favorably than other debts in the lead-up to bankruptcy, but if there is any hope at all for them to be discharged, this showing of good faith efforts is a necessary element that practitioners need to be aware of at the counseling stage.
As for the other elements, they are not based on conduct, but professionals should still take efforts to make their client’s case as straightforward as possible. Creating a record from the earliest stages of the petition as to the existence of the hardship and the degree to which such hardship will persist may be the best chance for these debtors to find relief. That said, under the strict rules of the test, even the best-prepared debtor and professionals will have a hard time getting these debts discharged.
While school may be out for summer, unless and until the Supreme Court or Congress takes action to fix this divide across the country and give a degree of consistency to courts and debtors, for many borrowers, school won’t be out forever.
Joseph Pack is the founder and managing partner, and Jessey Krehl is an associate, at Pack Law.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 McCoy v. United States, No. 20-886, 2021 U.S. LEXIS 3264 (June 21, 2021).
 In re Long, 322 F.3d 549, 554–55 (8th Cir. 2003).
 Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).
 In re Courtney, 79 B.R. 1004, 1011 (Bankr. N.D. Ind. 1987).
 In re Grimes, 2013 WL 5592913 (Bankr. D. Neb. Oct. 10, 2013).