Administrative law and procedure - student loan discharges under Chapter 13 bankruptcy and ripeness for adjudication - Educational Credit Management Corp. v. Coleman (In re Coleman).

• Author: Wilson, Carolyn J.

In a volatile economy, people increasingly rely upon student loans to pay for higher education, and, accordingly, questions related to the discharge of those loans under Chapter 13 decisions become more pertinent. (1) Under current bankruptcy laws, student loans are not dischargeable under Chapter 13 unless the debtor can show that repayment would result in an undue hardship. (2) The Constitution requires that issues for adjudication in federal courts be "ripe," that is, there is an actual controversy between the two parties. (3) In Educational Credit Management Corp. v. Coleman (In re Coleman), (4) the United States Court of Appeals for the Ninth Circuit considered whether a court may make an undue hardship determination for student loan discharge under a Chapter 13 bankruptcy substantially in advance of payment plan completion. (5) The Ninth Circuit held that the undue hardship determination was ripe for adjudication prior to completion of the Chapter 13 payment plan because the facts of the case were sufficiently developed, or "fit," and the debtor would suffer a hardship if the case was not adjudicated. (6)

On June 16, 2004, Coleman sought relief under Chapter 13 of the Bankruptcy Code, and the bankruptcy court subsequently approved a fiveyear repayment plan. (7) Less than one year after the plan was confirmed, Coleman sought an undue hardship determination for the more than $100,000 in student loans she owed. (8) She presented evidence that she had paid $1,000 on the debt, but believed she could not make further payments because she was unemployed. (9) Coleman struggled to find regular work after earning a bachelor's degree and completing part of a master's degree. (10) Despite working intermittently as a teacher, Coleman's sole source of income was unemployment benefits at the time she filed for discharge. (11)

Educational Credit Management Corporation ("ECMC") sought to have Coleman's complaint dismissed on two grounds: (1) Coleman lacked subject matter jurisdiction and (2) the issue of the undue hardship determination was not ripe for adjudication. (12) The bankruptcy court denied ECMC's motion. (13) The district court affirmed the ruling and ultimately certified the matter for interlocutory appeal on a controlling question of law. (14) On appeal, the Ninth Circuit considered whether an undue hardship determination can be made prior to a payment plan nearing completion in a Chapter 13 bankruptcy petition. (15)

Lawmakers created bankruptcy laws to provide individuals with a financial "fresh start" when problems occurred outside of their control. (16) Chapter 13 allows income-earning debtors to create a plan for repayment of debt, and was designed as an alternative to Chapter 7, which liquidates the assets of the debtor. (17) Changes to bankruptcy laws over the years have resulted in stricter requirements for discharge of student loans under both Chapter 7 and Chapter 13, as an attempt to deter students from filing bankruptcy immediately upon graduation. (18) Despite this stringent statutory language, individuals may be entitled to a discharge of student loan debt if they can demonstrate that repayment of the loan would result in an undue hardship. (19) A court must consider whether an undue hardship determination can be made before a payment plan is completed under Chapter 13. (20) The statutory language does not directly address whether an undue hardship determination can be made in advance of payment plan completion, but it does indicate that debts will not be discharged unless the Chapter 13 debtor completes the payments under the plan. (21) As a result, the federal circuit courts are split over the appropriate timing for an undue hardship determination in a Chapter 13 bankruptcy. (22)

Courts use the three-part test developed in Brunner v. New York State Higher Education Services Corp. (23) to determine undue hardship in both Chapter 7 and Chapter 13 bankruptcy cases. (24) Though the Brunner three-part test was initially intended for Chapter 7 bankruptcy cases, courts have recently begun to apply it to Chapter 13 cases, resulting in significant timing issues. (25) Brunner established three elements for determining undue hardship: (1) the debtor is unable to maintain a "minimal" standard of living, (2) the debtor's current financial situation is going to continue over the period of loan repayment and, (3) the debtor has made a good faith effort to repay the loans. (26) This test provides the court with a framework to determine whether the debtor is likely to experience undue hardship if his or her student loans are not discharged as part of the bankruptcy decision. (27) The Second Circuit in Brunner emphasized the importance of considering good faith in reviewing the debtor's situation, reflecting congressional intent to make discharge of student loans more difficult. (28) Application of the Brunner test in a Chapter 13 decision can be very challenging in large part because it was created for Chapter 7 cases where resolution of debts is done in one decision and all factors are considered at the point of discharge. (29) The proper application of the Brunner test, as well as an inquiry into the ripeness of the undue hardship determination, will depend significantly on the facts presented in each case. (30) Although the Brunner test is implicated in an undue hardship determination, the bankruptcy code, case law and Federal Rules of Bankruptcy Procedure give no timing requirement as to when the test should be applied in a Chapter 13 proceeding. (31) Consequently, the circuit courts are split over when to apply the Brunner test in a Chapter 13 bankruptcy, leaving debtors uncertain as to whether their claim is ripe for adjudication. (32)

Courts determine ripeness for adjudication by considering both constitutional and prudential concerns. (33) Constitutional ripeness sets a baseline by requiring that a controversy exist between the parties that needs immediate resolution by the courts. (34) In Abbott Laboratories v. Gardner, (35) the United States Supreme Court created a two-prong prudential ripeness test that is used for judicial review of administrative agency actions. (36) Under this two-prong test, a court must analyze: (1) whether the issues are fit for judicial determination, and (2) whether failure to adjudicate would result in undue hardship to the parties. (37) For example, the Ninth Circuit applied the Abbott test to a Chapter 7 bankruptcy case and determined the issues were ripe for adjudication. (38) Despite this application of the test to a Chapter 7 bankruptcy case, the Ninth Circuit has ruled that the test is not appropriate for determining ripeness in a contract case involving private parties. (39) In Principal Life Insurance Co. v. Robinson, (40) the Ninth Circuit reasoned that "the appropriate standard for determining ripeness of private party contract disputes is the traditional ripeness standard," which includes only the constitutional ripeness standard. (41) While few courts have acknowledged application of the prudential ripeness test to bankruptcy cases, courts have consistently inquired as to whether the facts are sufficiently developed to minimize speculation and whether a delay in adjudication would cause hardship to the parties. (42) Most courts utilize a combination of constitutional and prudential ripeness concerns when analyzing bankruptcy cases. (43)

In Coleman, the Ninth Circuit considered whether a debtor could seek an undue hardship determination substantially in advance of Chapter 13 payment plan completion. (44) The court first applied the undue hardship standard established in Brunner for the discharge of student loans in bankruptcy cases. (45) Then, the court addressed the question of timing by examining constitutional and prudential ripeness issues within the context of bankruptcy. (46) In light of the specific and defined debt in question, the court held that a substantial controversy existed between Coleman and ECMC. (47) Despite Coleman's potential failure to complete her payment plan, the court found that the dispute was constitutionally ripe. (48)

In determining prudential ripeness, the Ninth Circuit applied the Abbott two-prong test, directly contradicting its prior determination that the test was not applicable to private contract cases. (49) In addressing the issue of "fitness," the court reasoned that delaying a decision would not serve to produce or encourage more facts that would aid in a adjudication of the matter. (50) Despite inherent speculation as to the debtor's future financial situation, the court held that this uncertainty does not render the case unfit for an undue hardship determination. (51) Given Coleman's already strained financial situation, the court determined that a delay in the discharge decision would meet the hardship prong of the Abbott test. (52) The Ninth Circuit reasoned that a debtor should not be penalized for choosing Chapter 13 over Chapter 7 by having to wait five years without any guarantee of an undue hardship determination. (53) According to the court, a debtor who is denied an undue hardship determination because the issue is not ripe "may be forced to rely on public benefits-or may turn to credit as a means of meeting their basic needs." (54) Utilizing the two prongs of the Abbott test, the Ninth Circuit concluded that the issues presented were fit because they required no further development and that Coleman would suffer hardship if a determination was delayed until her Chapter 13 plan was completed. (55) The court, therefore, held that the undue hardship determination was ripe for adjudication substantially in advance of payment plan completion. (56)

The Ninth Circuit correctly found that an undue hardship determination for dischargeability of student loans may be proper in advance of Chapter 13 payment plan completion. (57) In line with congressional intent, the court looked to ensure that debtors are...