Filed: Nov. 28, 1995
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 11-28-1995 Pennsylvania Higher Education Assistance Agency v. Faish Precedential or Non-Precedential: Docket 95-7178 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "Pennsylvania Higher Education Assistance Agency v. Faish" (1995). 1995 Decisions. Paper 298. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/298 This decision is brought to
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 11-28-1995 Pennsylvania Higher Education Assistance Agency v. Faish Precedential or Non-Precedential: Docket 95-7178 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "Pennsylvania Higher Education Assistance Agency v. Faish" (1995). 1995 Decisions. Paper 298. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/298 This decision is brought to ..
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Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
11-28-1995
Pennsylvania Higher Education Assistance Agency
v. Faish
Precedential or Non-Precedential:
Docket 95-7178
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995
Recommended Citation
"Pennsylvania Higher Education Assistance Agency v. Faish" (1995). 1995 Decisions. Paper 298.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/298
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 95-7178
IN RE: MARJORIE JO FAISH,
Debtor
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
v.
MARJORIE JO FAISH,
Appellant
On Appeal from the United States District Court
for the Middle District of Pennsylvania
D.C. No. 94-cv-01353
Submitted Pursuant to Third Circuit LAR 34.1(a)
October 19, 1995
BEFORE: SCIRICA, COWEN and ROTH
Circuit Judges
(Filed November 28, l995)
Marjorie Jo Faish
4237-D Williamsburg Drive
Harrisburg, PA 17109
Appellant Pro Se
K. Kevin Murphy
Pennsylvania Higher Education
Assistance Agency
1200 North 7th Street
Harrisburg, PA 17102
Counsel for Appellee
Pennsylvania Higher Education
Assistance Agency
1
OPINION
COWEN, Circuit Judge.
In this case we must decide whether appellant Marjorie Jo
Faish is entitled to have her student-loan obligation discharged
in a Chapter 7 bankruptcy proceeding. If Faish can establish
that repayment of her student-loan debt would result in "undue
hardship" under § 523(a)(8)(B) of the Bankruptcy Code, she is
entitled to have her entire debt discharged. 11 U.S.C. §
523(a)(8)(B).
The Bankruptcy Court for the Middle District of
Pennsylvania, citing equitable considerations, held that Faish
need repay only $15,000.00, less than half of her loan
obligation. On appeal, the District Court for the Middle
District of Pennsylvania, applying a modified version of the
"undue hardship" test set forth in In re Johnson, 5 Bankr. Ct.
Dec. 532 (Bankr. E.D. Pa. 1979), reversed the bankruptcy court.
The district court held that because Faish had failed to
establish that the repayment of her entire student-loan
obligation would impose "undue hardship," no discharge was
appropriate here.
We must also decide what legal standard bankruptcy courts
within the Third Circuit will now apply when they consider
whether the facts presented give rise to "undue hardship," as
that term is to be construed under § 523(a)(8)(B). This area of
the law is presently in a state of considerable confusion, with
2
bankruptcy courts within our Circuit applying a broad range of
standards.1
For the reasons
stated herein, we adopt the standard for "undue hardship" set
forth by the Court of Appeals for the Second Circuit in Brunner
v. New York State Higher
Education Services Corp., 831 F.2d 395 (2d Cir. 1987) (per
curiam). Pursuant to this standard, although different from the
one applied by the district court below, we will affirm the
district court's order that Faish's student-loan debt must be
deemed nondischargeable in its entirety.
I.
Marjorie Jo Faish obtained a Master's Degree in Public
Health and Community Health Services Administration from the
University of Pittsburgh in 1989. To help defer the costs of her
education, Faish obtained $31,879.31 in guaranteed student loans
from the Pennsylvania Higher Education Assistance Agency
("PHEAA").
1
The Bankruptcy Court for the Western District of
Pennsylvania's recitation of the following bankruptcy court
decisions that have developed separate tests "to determine
whether the facts of a case constitute undue hardship" is
indicative of the current uncertainty. See In re Correll, 105
B.R. 302, 305 (Bankr. W.D. Pa. 1989) (citing Brunner v. New York
State Higher Educ. Servs. Corp.,
831 F.2d 395 (2d Cir. 1987) (per
curiam); In re Conner,
89 B.R. 744 (Bankr. N.D. Ill. 1988); In
re Bryant,
72 B.R. 913 (Bankr. E.D. Pa. 1987); In re Craig,
64
B.R. 854 (W.D. Pa. 1986); In re Johnson, 5 Bankr. Ct. Dec. 532
(Bankr. E.D. Pa. 1979)).
3
Under the terms of the loan agreements, Faish was required to
commence payments on her student-loan obligation on October 1,
1991.
On
September 27, 1993, Faish filed a Chapter 7 bankruptcy petition
with the Bankruptcy Court for the Middle District of
Pennsylvania. On the same day, Faish filed a complaint to
determine the dischargeability of her student loan debt to PHEAA.
A trial on the issue of dischargeability was conducted on
December 22, 1993.
On July 12, 1994, the bankruptcy court rendered its
decision, making the following factual findings. See In re
Faish, No. 93-01686, slip op. at 2-3 (Bankr. M.D. Pa. July 12,
1994). Faish has a job working for the Commonwealth of
Pennsylvania in the Department of Public Welfare, Bureau of
Financial Operations, as a budget analyst. She earns a yearly
gross salary of approximately $27,000.00. Faish does not own an
automobile and commutes to and from work by bus. She has been
unsuccessful in her pursuit of a higher-paying job.
Faish is thirty-years-old, unmarried and has an eleven-year-
old son. Faish does not receive any child support payments from
the father of her child. She is concerned about the quality of
the neighborhood and school district that she lives in and is now
saving money for an automobile and a new apartment in a better
area.
Faish suffers from Crohn's disease, a chronic condition
affecting the bowel. She also has back problems. The bankruptcy
4
court found, however, that although Faish's health problems are
"significant," they "are not interfering with her ability to
work." Id. at 5.
Faish's original principal debt to PHEAA amounted to
$31,879.31. From November 13, 1991, through June 2, 1993, Faish
repaid $4,629.92 of her loan obligation. As of September 1993,
Faish owed PHEAA $32,989.33. Id. at 2.
After setting forth these factual findings, the bankruptcy
court observed that "[o]ur district court has adopted the test
for undue hardship set forth in In re Johnson . . . . The Johnson
test divides the undue hardship inquiry test into three prongs:
a mechanical test, a good faith test, and a policy test." Id. at
4. Applying the first prong of the Johnson test, the bankruptcy
court concluded that "Faish has failed to establish a lack of a
financial ability to repay for the foreseeable future and
therefore fails the mechanical prong of the Johnson test."
Id.
at 5.
Although the Johnson court expressly held that if a student-
loan debtor fails to satisfy the mechanical test, "discharge of
the student loan must be denied," Johnson, 5 Bankr. Ct. Dec. at
544, the bankruptcy court below went on to apply Johnson's good
faith and policy tests. As to the Johnson "good faith" test, the
bankruptcy court found that Faish had "established a sufficient
degree of good faith." Faish, No. 93-01686, slip op. at 6.
However, Faish failed the "policy test" because "avoidance of the
obligation was a significant consideration in the filing." Id.
5
Even though Faish had failed the Johnson "undue hardship"
test, the bankruptcy court went outside the Johnson framework and
considered what it deemed to be equitable considerations. The
court cited a bankruptcy court decision from another
jurisdiction, Woyame v. Career Education & Management (In re
Woyame),
161 B.R. 198 (Bankr. N.D. Ohio 1993), as authority for
the proposition that bankruptcy courts have "some latitude in the
amount of the nondischargeability determination even where
individual prongs of the Johnson test are not met on their face."
Faish, No. 93-01686, slip op. at 7.
The bankruptcy court concluded that "[b]ased upon the
equities involved, Faish will be given partial relief." Id. at
8.2 The court observed that it was "especially influenced . . .
by Faish's need to support a young dependent, and her desire to
accumulate some savings in order to provide a better life for
him."
Id. at 7-8. Accordingly, the bankruptcy court held that
"$15,000.00 of Faish's student loan debt will be deemed to be
nondischargeable, and the remainder of the obligation, including
2
The bankruptcy court reached this conclusion despite its
earlier findings that
Faish's current employment and income are good, as are her
future employment and income prospects. Although a payment
to PHEAA of nearly $300.00 impacts significantly upon
Faish's disposable income, it does not place her or her son
below the subsistence level. Indeed, Faish has managed to
incorporate a savings component into her expenses, which is
rare in my experience among debtors applying for
dischargeability based upon undue hardship. Additionally,
Faish's degree qualifies her for promotion and/or more
favorable employment.
In re Faish, No. 93-01686, slip op. at 5 (Bankr. M.D. Pa. July
12, 1994).
6
accrued and future interest, will be deemed to be dischargeable."
Id. at 8.
On February 21, 1995, the District Court for the Middle
District of Pennsylvania issued a memorandum opinion reversing
the bankruptcy court. The district court expressly rejected the
bankruptcy court's assumption that it was bound by Johnson.
Faish, No. 94-1353, slip op. at 4 n.2 (M.D. Pa. Feb. 21, 1995).
The district court noted, however, that while it "would not
rigidly confine itself to Johnson's tripartite analysis," it
would abide by Johnson's "general framework." Id. at 4.
The district court observed that it was "the bankruptcy
judge's step beyond Johnson which has given rise to PHEAA's
appeal." Id. at 6. The district court then reviewed the
propriety of the bankruptcy judge's consideration of equitable
factors not contemplated by Johnson's three-pronged inquiry. The
court stated in dictum that "the bankruptcy court must be
prepared to move beyond Johnson to the extent that the Johnson
analysis fails to capture scenarios requiring some form of
student debt relief to alleviate undue hardship."
Id. at 7.
However, "the circumstances necessary to justify discharge must
be unusual, and the hardship faced in the event of full repayment
must be substantial."
Id. Citing Faish's favorable employment
prospects, the court concluded that "the continued viability of
governmentally guaranteed student loans is simply incompatible
with discharging student debt on the instant facts."
Id. at 7-8.
Accordingly, the district court ordered that "Faish's student
7
debt must be deemed nondischargeable in its entirety." Id. at 8.
This appeal followed.
II.
We have jurisdiction under 28 U.S.C. § 158(d). Our review
of the district court's interpretation of the Bankruptcy Code is
plenary. Leeper v. Pennsylvania Higher Educ. Assistance Agency,
49 F.3d 98, 100 (3d Cir. 1995); In re Pelkowski,
990 F.2d 737,
739 (3d Cir. 1993). The debtor has the burden of demonstrating
undue hardship. Woodcock v. Chemical Bank, NYSHESC (In re
Woodcock),
45 F.3d 363, 367 (10th Cir.), cert. denied,
64
U.S.L.W. 3241 (U.S. 1995); In re Roberson,
999 F.2d 1132, 1137
(7th Cir. 1993).
III.
Section 523(a)(8)(B) of the Bankruptcy Code provides as
follows:
(a) A discharge under section 727, 1141, 1228(a), 1228(b),
or 1328(b) of this title does not discharge an individual debtor
from any debt--
. . .
(8) for an educational benefit overpayment or loan made,
insured or guaranteed by a governmental unit, or made under any
program funded in whole or in part by a governmental unit or
nonprofit institution, or for an obligation to repay funds
received as an educational benefit, scholarship or stipend,
unless--
(A) such loan, benefit, scholarship, or stipend overpayment
first became due more than 7 years (exclusive of any applicable
suspension of the repayment period) before the date of the filing
of the petition; or
(B) excepting such debt from discharge under this paragraph
will impose an undue hardship on the debtor and the debtor's
dependents;
11 U.S.C. § 523(a)(8)(B) (emphasis added).
8
Section 523(a)(8)(B) was passed as part of the Bankruptcy
Reform Act of 1978. As one commentator has explained, the "undue
hardship" exception of § 523(a)(8)(B)
is difficult to apply because the drafters of the Bankruptcy
Code did not define undue hardship. The drafters said that
bankruptcy courts must decide undue hardship on a case-by-
case basis, considering all of a debtor's circumstances.
Looking for guidance in the undue hardship cases, the
bankruptcy courts have shaped facts and circumstances tests
of undue hardship by relying on the legislative history of
section 523(a)(8).
Kurt Wiese, Note, Discharging Student Loans In Bankruptcy: The
Bankruptcy Court Tests of "Undue Hardship," 26 Ariz. L. Rev. 445,
447 (1984) (hereinafter Wiese, Undue Hardship).
Examining the Congressional Record in order to discern the
legislative purpose behind the enactment of § 523(a)(8)(B), we
observed in In re Pelkowski that "the debate in the main focused
on the twin goals of rescuing the student loan program from
fiscal doom and preventing abuse of the bankruptcy process by
undeserving debtors." Pelkowski, 990 F.2d at 743. Thus, the
Pelkowski court expressed agreement with the conclusion of the
Court of Appeals for the Sixth Circuit that "Congress enacted 11
U.S.C. § 523(a)(8) in an effort to prevent abuses in and protect
the solvency of educational loan programs."
Id. (quoting In re
Merchant,
958 F.2d 738, 742 (6th Cir. 1992)).
The Pelkowski court held that "[t]he Congressional intent to
eliminate debtor abuse of the educational loan program would
apply both to single makers of loan notes and to co-makers,
whether students or their parents or other co-signers, as all may
abuse the bankruptcy system or take advantage of legal
9
loopholes." Pelkowski, 990 F.2d at 744. The court concluded that
"Congress has revealed an intent to limit the dischargeability of
educational loan debt, and we can construe the provision no more
narrowly than the language and the legislative history allow."
Id. at 745. See Darrell Dunham & Ronald A. Buch, Educational
Debts Under the Bankruptcy Code, 22 Mem. St. L. Rev. 679, 702
(1992) (hereinafter Dunham & Buch, Educational Debts) ("Congress
clearly intended that most educational debt still due within
seven years of graduation should be nondischargeable.").
IV.
A.
Before we address the merits of Faish's petition, we must
decide which of the several "undue hardship" tests should be
applied in the present matter. As one commentator has explained,
"[b]ankruptcy courts use a wide variety of tests to determine
whether the debtor has demonstrated undue hardship. While these
tests have received varying degrees of acceptance, no particular
test authoritatively guides or governs the undue hardship
determination." Thad Collins, Note, Forging a Middle Ground:
Revision of Student Loan Debts in Bankruptcy as an Impetus to
Amend 11 U.S.C. § 523(a)(8), 75 Iowa L. Rev. 733, 744 (1990).
Due to this lack of a "unified approach to undue hardship,
litigants are in the difficult position of not knowing which
standard will govern their case. Consequently, effective
presentation of evidence on undue hardship is made difficult
unless the jurisdiction has definitively and unequivocally
10
adopted one test and a consistent set of determinative factors."
Id. at 747. It is to this task that we now turn.
The three most prominent tests applied to determine whether
the "undue hardship" exception of § 523(a)(8)(B) should be
invoked are the Johnson test, the Bryant test and the Brunner
test. The Johnson and Bryant tests have been described as "the
two most prominent tests" bankruptcy courts have applied to
decide whether the "undue hardship" exception should apply.
Dunham & Buch, Educational Debts, supra, at 695. The Brunner
test has been adopted by a majority of the Courts of Appeals that
have specifically addressed the issue of what single standard
should be applied to determine whether "undue hardship" exists
under 11 U.S.C. § 523(a)(8)(B). See
Brunner, 831 F.2d at 395
(setting forth the Brunner test); In re Roberson,
999 F.2d 1132
(7th Cir. 1993) (adopting the Brunner test); see also Cheesman
v. Tennessee Student Assistance Corp. (In re Cheesman),
25 F.3d
356 (6th Cir. 1994), cert. denied, 115 S. Ct. 731 (1995)
(applying the Brunner test). We will now discuss in detail the
content and respective merits of these three "undue hardship"
standards.
1. The Johnson Test
The tripartite Johnson test was set forth by the Bankruptcy
Court for the Eastern District of Pennsylvania in In re Johnson,
5 Bankr. Ct. Dec. at 532. The Johnson test provides as follows:
In determining whether the undue hardship exception entitles
a specific debtor to discharge of his student loan, a court
should rely on three tests:
(1) Mechanical Test: The court must ask: Will the
debtor's future financial resources for the longest
11
foreseeable period of time allowed for repayment of the
loan, be sufficient to support the debtor and his dependents
at a subsistence or poverty standard of living, as well as
to fund repayment of the student loan? If the question is
answered affirmatively, discharge of the student loan must
be denied. If answered negatively, then the court must apply
the good faith test:
(2) Good Faith Test: Here, the court asks two
questions:
(a) Was the debtor negligent or irresponsible in his
efforts to minimize expenses, maximize resources, or secure
employment?
(b) If "yes," then would lack of such negligence or
irresponsibility have altered the answer to the mechanical
test?
If the answer to the first part of the good faith test
is no, then the debtor should be discharged of the
obligation to repay his student loan. However, if the
answers to both parts of the good faith test are "yes," then
a presumption against discharge is established--which may be
rebutted by a negative answer to the third and final test.
(3) . . . Policy Test: The court must ask: Do the
circumstances--i.e., the amount and percentage of total
indebtedness of the student loan and the employment
prospects of the petitioner indicate:
(a) That the dominant purpose of the bankruptcy
petition was to discharge the student debt, or
(b) That the debtor has definitely benefitted
financially from the education which the loan helped to
finance?
If the answer to both parts of this question is a firm
"no," then the debtor should be discharged from his student
loan obligation. If the court answers "yes" to either part
of the question, then discharge should be denied.
Id. at 544.
Johnson's tripartite analysis appears to be both
unnecessarily complicated and unduly cumbersome. When Johnson is
applied correctly, however, most petitions will be denied after
the mechanical test is applied. Thus, in this sense, the Johnson
test is in accord with our recognition of the Congressional
12
objectives of preventing abuse of the bankruptcy process and
protecting the financial integrity of the student loan program.
Pelkowski, 990 F.2d at 743-44. Similarly, both the good faith
and policy tests provide additional protection against abuse of
the student loan program. The Johnson test, by its terms,
contains no provision that would permit bankruptcy courts to
negate a finding of nondischargeability based upon an assessment
of other "equitable considerations" that may be deemed to be
relevant.
2. The Bryant Test
The Bryant test was set forth by the Bankruptcy Court for
the Eastern District of Pennsylvania eight years after Johnson
was decided. In re Bryant, 72 B.R. 913 (Bankr. E.D. Pa. 1987).
The Bryant court criticized the three-part Johnson test as
"unfortunately complicated" and promulgated an alternative test
for "undue hardship."
Id. at 915 n.2. The Bryant court
explained its standard in the following terms:
The test which we propose strives to place the element of
objectivity into the process of decision-making in this
area. We propose, as a starting position, to analyze the
income and resources of the debtor and his dependents in
relation to federal poverty guidelines established by the
United States Bureau of the Census and determine the
dischargeability of the student loan obligation on the basis
of whether the debtor's income is substantially over the
amounts set forth in those guidelines or not. If not, a
discharge will result only if the debtor can establish
"unique" and "extraordinary" circumstances which should
nevertheless render the debt dischargeable. If the debtor's
income is below or close to the guideline, the lender can
prevail only by establishing that circumstances exist which
render these guidelines unrealistic, such as the debtor's
failure to maximize his resources or clear prospects of the
debtor for future income increases. We feel that such a
test will decrease, if not eliminate the resort to the
13
unbridled subjectivity which seems to pervade many of the
decisions in this area.
Id. at 915. Elaborating upon its new "undue hardship" exception
standard, the bankruptcy court observed that "[w]e find ourselves
in disagreement with those courts which have denied discharges of
student loans on the basis of whether any given expenses are
justified, as these represent subjective value judgments
concerning which we consider ourselves no better able to gauge
than, generally, debtors themselves."
Id. at 918.
We expressly reject and depart from this reasoning and
analysis. The Bryant test's refusal (or at least extreme
reluctance) to question whether certain expenses debtors have
incurred can be justified seems inconsistent with Congress' dual
legislative goals of "eliminat[ing] debtor abuse of the
educational loan program" and "preserv[ing] the fiscal integrity
of the student loan program." Pelkowski, 990 F.2d at 744. The
Bryant test does not adequately account for the fact that one of
the most common reasons student-loan debtors find themselves in
bankruptcy court is that their "subjective value judgments" are
often (but not always) indicative of a spendthrift philosophy
which a bankruptcy court should be competent to consider before
discharging their student loans.
The Bryant court also expressed disagreement with the first
inquiry of the Johnson "policy test," which asks if "the dominant
purpose of the bankruptcy petition was to discharge the student
debt." Johnson, 5 Bankr. Ct. Dec. at 544. The Bryant court
declared that since "avoiding the consequences of debts is
14
normally the reason for filing for bankruptcy . . . the fact that
the Debtor seeks to discharge almost exclusively student loan
obligations . . . should be irrelevant." Bryant, 72 B.R. at 915
n.2. We disagree. The purpose behind the debtor's bankruptcy
petition is not irrelevant in this context because one of the
reasons that Congress enacted § 523(a)(8)(B) was in response to
"reports of students discharging student loan debts after
graduation and subsequently accepting high-paying jobs." Wiese,
Undue
Hardship, supra, at 446. See
Brunner, 831 F.2d at 396
(Congress intended "to make the discharge of student loans more
difficult than that of other nonexcepted debt."). For these
reasons, we decline to adopt the Bryant test.
3. The Brunner Test
As the Court of Appeals for the Second Circuit has observed,
before Brunner was decided there was "very little appellate
authority on the definition of `undue hardship' in the context of
11 U.S.C. § 523(a)(8)(B)." Brunner, 831 F.2d at 396. Relying
upon the reasoning of the district court below,3 the Brunner
court set forth the following three-part test for the "undue
hardship" exception:
(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 for student loans; and (3)
that the debtor has made good faith efforts to repay the
loans.
3
See 46 B.R. 752 (Bankr. S.D.N.Y. 1985),
aff'd, 831 F.2d at
395.
15
Id.
The Court of Appeals for the Seventh Circuit formally
adopted the Brunner test in In re
Roberson, 999 F.2d at 1132. In
Roberson, both the bankruptcy court and the district court below
had applied the three-part Johnson test. After expressly
rejecting the Johnson test and giving the Brunner test its
imprimatur, the Seventh Circuit described how the Brunner test
should properly be applied.
The Roberson court observed that "[t]he first prong of
Brunner requires an examination of the debtor's current financial
condition to see if payment of the loans would cause his standard
of living to fall below that minimally necessary." Id. at 1135.
The court admonished that the other prongs of the Brunner test
should not be examined if the first prong has not been satisfied.
Id.
The second prong of the Brunner test requires "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."
Brunner, 831 F.2d at
396. The Roberson court observed that this requirement "properly
recognizes the potential continuing benefit of an education, and
imputes to the meaning of `undue hardship' a requirement that the
debtor show his dire financial condition is likely to exist for a
significant portion of the repayment period."
Roberson, 999 F.2d
at 1135.
The third prong of the Brunner test is the good faith
inquiry. The Roberson court noted that the question of good faith
16
should only be reached if the debtor has satisfied the first two
elements. See id. at 1136. The good faith inquiry is to be
guided by the understanding that "undue hardship encompasses a
notion that the debtor may not willfully or negligently cause his
own default, but rather his condition must result from `factors
beyond his reasonable control.'"
Id. (quoting Comm'n on the
Bankruptcy Laws of the United States, Report, [H.R. Doc. No. 137,
93d Congress, 1st Sess., Pt. II], at 140 n.16).
The Roberson court rejected the second prong of the Johnson
"policy test," which considers "whether the debtor `has
definitely benefitted financially from the education which the
loan helped to finance.'" Id. at 1136 (quoting Johnson, 5 Bankr.
Ct. Dec. at 544). The court observed that "[s]uch an inquiry
conflicts with the basic concept of government-backed student
loans."
Roberson, 999 F.2d at 1136.
The Seventh Circuit cited the Southern District of New
York's statement in Brunner that federal student loan programs
were not designed to "turn[] the government into an insurer of
educational value." Id. (quoting Brunner, 46 B.R. 752, 756 n.3
(S.D.N.Y. 1985)). Students who benefit from guaranteed loan
programs normally "would not be eligible to receive any financing
or only financing at a higher rate of interest . . . ."
Roberson, 999 F.2d at 1136. Since "[t]he decision of whether or
not to borrow for a college education lies with the individual,"
it is "the student, not the taxpayers, [that] must accept the
consequences of the decision to borrow."
Id. at 1137.
17
We agree with the Seventh Circuit's analysis and we offer
another criticism of the Johnson test. Johnson is needlessly
verbose and multifaceted. Its multiple tests and the subsidiary
questions required to be answered thereunder do not provide the
required clear statement of what the law is. For these reasons,
we decline to adopt the Johnson "undue hardship" test as the law
of this Circuit.
B.
Of the three tests that we have considered, Brunner is the
most consistent with the scheme that Congress established in
1978. The Brunner standard meets the practical needs of the
debtor by not requiring that he or she live in abject poverty for
up to seven years before a student loan may be discharged. On
the other hand, the Brunner standard safeguards the financial
integrity of the student loan program by not permitting debtors
who have obtained the substantial benefits of an education funded
by taxpayer dollars to dismiss their obligation merely because
repayment of the borrowed funds would require some major personal
and financial sacrifices.
The Brunner test is the most logical and workable of the
established tests. Analysis under Brunner is not hampered either
by the flawed Johnson "policy test" or the unwarranted deference
with which the Bryant test reviews the personal spending habits
of student-loan debtors. Brunner's concise formulation is both
easier to follow and to apply than Johnson's. We therefore hold
that the Brunner "undue hardship" test must now be applied by
bankruptcy courts within the Third Circuit.
18
V.
Brunner now provides the definitive, exclusive authority
that bankruptcy courts must utilize to determine whether the
"undue hardship" exception applies. Student-loan debtors have
the burden of establishing each element of the Brunner test. All
three elements must be satisfied individually before a discharge
can be granted. If one of the requirements of the Brunner test
is not met, the bankruptcy court's inquiry must end there, with a
finding of no dischargeability. See id. at 1135. Equitable
concerns or other extraneous factors not contemplated by the
Brunner framework may not be imported into the court's analysis
to support a finding of dischargeability. See Norwest Bank
Worthington v. Ahlers,
485 U.S. 197, 206,
108 S. Ct. 963, 969
(1988) ("whatever equitable powers remain in the bankruptcy
courts can only be exercised within the confines of the
Bankruptcy Code").
Applying the factual findings of the bankruptcy court below,
we now must determine whether Faish has satisfied her burden of
establishing that repayment of her student-loan obligation would
impose an "undue hardship" upon her.4 Applying the first prong
of the Brunner test, we must determine whether Faish "cannot
maintain, based on current income and expenses, a `minimal'
standard of living for herself and her dependents if forced to
repay the loans." Brunner, 831 F.2d at 396.
4
We conclude that sufficient facts appear in the record to
enable us to perform the Brunner analysis. Remand, therefore, is
unnecessary.
19
The bankruptcy court found that Faish was employed by the
Commonwealth of Pennsylvania, Department of Public Welfare,
Bureau of Financial Operations, as a budget analyst at the time
of trial. She earned a gross yearly salary of $27,000.00 in 1993.
The court found that "Faish's current employment and income were
good," and that while "a payment to PHEAA of nearly $300.00
[per month] impacts significantly upon Faish's disposable income,
it does not place her or her son below the subsistence level."
Faish, No. 93-01686, slip op. at 5.
The first prong of the Brunner analysis requires more than a
showing of tight finances. Faish has failed to establish through
evidence presented at trial that, based upon her current income
and expenses, she could not maintain a minimal standard of living
if forced to repay her loans. Therefore, we conclude that Faish
has failed to satisfy the first element of the Brunner test.
Accordingly, we need not decide whether she would have satisfied
the second and third elements of our new standard. We therefore
hold that Faish's entire student-loan obligation is
nondischargeable.
Although Faish has a steady job, she argues that her
inability to find a job in her chosen field militates in favor of
discharge. In response to a similar claim, the Southern District
of New York in Brunner denied a discharge in bankruptcy to a
student-loan debtor who was far less fortunate than Faish. The
student-loan debtor in Brunner entered college in 1972. She
received a "Bachelor's degree in Psychology in 1979 and a
Master's degree in social work in 1982." Brunner, 46 B.R. at
20
756. Appellee Marie Brunner "testified that she had sent out
`over a hundred' resumes in search of employment in her chosen
field."
Id. at 757. Nonetheless, upon graduation Brunner was
unable to find work and at the time of her hearing she had been
supporting herself on public assistance for a period of four
months.
Id. In the decade prior to her bankruptcy hearing,
Brunner's "greatest annual income was $9,000."
Id. at 756.
Despite Brunner's inability to find work, the district court
held that she had failed to satisfy the first prong of the
Brunner test, which the court itself had just articulated. The
district court observed that Brunner
appears to be a woman who is unlikely to find a job in her
chosen field of work in the near future. However, she is an
apparently healthy, presumably intelligent, and well-
educated woman. Although she claimed to be unable to find
any other type of work, the evidence presented at the
hearing is too thin to support a finding that her chances of
finding any work at all are slim . . . . She has no
dependents or any other extraordinary burdens which would
impair her finding other work, or, once it is found, make it
unlikely that she can both support herself and pay off her
student loans.
In short, appellee at most proved that she is
currently--or was at the time of the hearing--unable both to
meet her minimal expenses and pay off her loans. This alone
cannot support a finding that the failure to discharge her
loans will impose undue hardship. (citations omitted).
Nothing in the record supports a finding that it is likely
that her current inability to find any work will extend for
a significant part of the repayment period of the loan or
that she has "a total incapacity now and in the future to
pay [her] debts for reasons not within [her] control."
(quoting In re Rappaport, 16 B.R. 615, 617 (Bankr. D.N.J.
1981)).
Id. at 757-58.
21
Today we adopt the reasoning of the Second Circuit. A
comparison of the facts in Brunner and Faish is telling. The
financial straits of the bankruptcy petitioner in Brunner appear
to have been far more serious than any short-term, belt-
tightening that may be required of Faish in order to repay her
student-loan obligation.
Faish does not satisfy the standard that we set forth today.
Moreover, full nondischargeability is especially appropriate here
because, in essence, Faish was asking the bankruptcy court to
allow a discharge of her student-loan obligation so that she
could devote the money (which could otherwise have been earmarked
for student loan payments) to savings for the purchase of a new
car and to settle into a new apartment. Cf. Matthews v. Pineo,
19 F.3d 121, 124 (3d Cir.), cert. denied,
115 S. Ct. 82 (1994)
(NHSC scholarship recipient's "current income and . . . expenses
should [not] be regarded as unalterable. Instead, the proper
inquiry is whether it would be `unconscionable' to require [the
debtor] to take any available steps to earn more income or to
reduce her expenses.").
VI. CONCLUSION
For the foregoing reasons, we adopt the Brunner "undue
hardship" standard to determine whether student-loan debt can be
discharged pursuant to 11 U.S.C. § 523(a)(8)(B). We further hold
that Faish has failed to satisfy her burden to establish undue
hardship under the Brunner standard and that her entire student-
loan obligation is nondischargeable. The judgment of the
district court will be affirmed.
22
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