Partial Discharge of Private Student Loan Debt: A Case Study

Andrew Longo, Jr. Case Study: Private Student Loan Debt Discharge

Pursuing private student loan debt discharge through bankruptcy can be a challenging and complex process, and it is important for borrowers to be aware of their options and understand the potential consequences before making any decisions. While the discharge of private student loan debt is not as straightforward as with federal student loans, it is still possible under certain circumstances. In this case study, we will explore one approach available to borrowers, which involves demonstrating "undue hardship" through the Brunner test.

In a recent bankruptcy case, Andrew Longo, Jr., sought to have his private student loan debt partially discharged due to undue hardship. The private lender and defendant in the case was Discover Bank, and the presiding bankruptcy judge was James J. Tancredi. This case study will analyze the court's decision, its application of the Brunner test to Longo's financial situation, as well as other factors that influenced the outcome.

The Treatment of Private Student Loan Debt in Bankruptcy

Understanding the treatment of private student loan debt and the provisions of the Bankruptcy Code is crucial for borrowers seeking relief. Unlike federal student loans, which have certain protections and options for repayment plans or forgiveness, private student loans are generally not dischargeable, meaning that borrowers will still be responsible for repaying them even after the bankruptcy process is complete.

However, there are options for borrowers who can demonstrate that repaying the debt would impose an undue hardship on their financial well-being. A commonly used standard to evaluate undue hardship is the Brunner test. This test, named after a 1987 court case, assesses three criteria to determine if discharging the student loan debt would impose undue hardship on the borrower. These criteria include:

1. The borrower must prove that they cannot maintain a minimal standard of living for themselves and their dependents while repaying the loan.
    
2. The difficult financial situation is likely to continue for a significant portion of the repayment period.
    
3. The borrower has made good faith efforts to repay the loan.

Successfully meeting these criteria can enable individuals to seek the discharge of private student loans under Chapter 7 bankruptcy, offering a potential lifeline for borrowers struggling with overwhelming debt burdens.

While the Brunner test has been widely adopted by courts, interpretations and precedents may vary. Courts have demonstrated some flexibility in their assessment of undue hardship, taking into account the unique circumstances of each individual case. This highlights the importance of consulting with an experienced bankruptcy attorney who can navigate the complexities of the legal system and present a strong case.

The Court's Interpretation of the Brenner Test in Longo's Case

Standard of Living Considerations

The first prong of the Brenner test requires the plaintiff to demonstrate an inability to maintain a minimal standard of living if forced to repay the loans. It goes beyond showing tight finances and entails more substantial sacrifices. Living at or below the poverty level is not the only benchmark for meeting this prong.

In the case of Longo, he argues that repaying the entire balance of $127,910.26 would constitute an undue hardship. In response to the court's request for additional evidence, Longo provided promissory notes, tax returns, and paystubs.

Examining Longo's financial situation, his monthly income is $3,265.05, while his monthly expenses amount to $2,578.40, leaving him with a surplus of $686.65 per month. Among his major expenses are rent, car payments, and entertainment.

Although Longo's income experienced an increase from 2018 to 2021 due to his full-time employment at Mohegan Sun, the setback of being furloughed in 2021 due to the COVID-19 pandemic was taken into consideration. It is worth noting that Longo did receive unemployment benefits during this period.

Looking ahead, Longo does not anticipate a significant increase in his income. Despite actively seeking higher-paying jobs, he has not yet been successful in securing one.

While Longo's decision to purchase a Jeep may be considered improvident, the court reviewed the reasonableness of his budget and concluded that his situation satisfied the first prong of the Brunner test.

Persisting Circumstances and Accelerated Loans

The second prong of the Brunner test necessitates demonstrating that additional circumstances indicate the debtor's ongoing financial struggles during the repayment period. 

Discover Bank had accelerated both loans and "charged off" the debt as a loss. Failure to discharge the loans would have allowed Discover to seek wage garnishment. The court acknowledged that a wage garnishment would significantly reduce any incentive for Longo to earn a raise, further perpetuating his financial situation. 

Based on these circumstances, the court determined that Longo had satisfied the second prong.

Examining Longo's Good Faith Efforts

The third prong of the Brunner test requires the plaintiff to demonstrate good faith efforts to repay the loans. 

Longo's attempts to negotiate a repayment plan with Discover Bank and his unsuccessful consolidation and refinancing efforts were discussed. Although Longo lacked documentary evidence to support his claims, the court found him to be generally credible. Notably, the court emphasized the importance of maximizing income to repay student loan debt. 

Despite Longo's limited efforts in this regard, Discover Bank's nonappearance ultimately worked in his favor, satisfying the second prong of the Brunner test.

The Court's Decision: Partial Discharge

The court determined that under the circumstances, it was permissible and equitable to provide measured relief. Accordingly, the court granted Longo's request to fully discharge Loan 1 and partially discharge Loan 2. Furthermore, a repayment plan was proposed to address the remaining balance. This approach ensures that appropriate measures are taken to address the private student loan debt while taking into account the specific details of the situation.

One key factor that influenced the court's decision was the acknowledgment of the unique challenges posed by accelerated loans. These loans often carry a higher interest rate or require larger monthly payments, which can make them particularly difficult for borrowers to manage. Recognizing this, the court took into account the undue hardship that Longo would face if both loans remained intact.

Another crucial consideration in the court's ruling was the threat of wage garnishment. Private student loan lenders have the ability to garnish a borrower's wages if they default on their loan payments, which can have devastating financial consequences. The court recognized the potential harm that this action could cause Longo and took it into account when determining the appropriate relief. By granting a partial discharge, the court aimed to alleviate the financial burden while still holding Longo responsible for a portion of the debt.

Overall, the court's decision in Longo's case represented a fair and thoughtful approach to private student loan debt discharge in bankruptcy. It highlighted the court's willingness to consider the unique circumstances of each borrower and provide relief that is both equitable and manageable.