Showing posts with label McDowell v. Educational Credit Management Corporation. Show all posts
Showing posts with label McDowell v. Educational Credit Management Corporation. Show all posts

Friday, August 11, 2017

Patricia McDade owes one third of a millon dollars in student loans, which she cannot discharge in bankruptcy

Patricia McDade owes one third of a million dollars in student loans, which she cannot discharge in bankruptcy. In a recent decision, Bankruptcy Judge Patrick M. Flatley ruled that McDade could make payments on her enormous debt and still maintain a decent standard of living.

"McDade has not demonstrated that she is unable to maintain a minimal standard of living while repaying at least some portion of her student loans," Judge Flatley wrote. Therefore, in Judge Flatley's opinion,  McDade did not meet her burden of showing that she would suffer "an undue hardship" if she was required to pay back her loans.

Judge Flatley made a mistake. Patricia McDade is 46 years old, and her student loan debt amounts to $333,000 (including $6,000 for her children's education). Although her annual salary was $63,000 at the time of her adversary proceeding, she represented that she was in danger of losing her job. There is no way Ms. McDade can pay back a third of a million dollars in student loans and maintain a decent standard of living, even if she remains permanently employed at her current salary.

Judge Flatley did not specify how much of McDade's student loan debt was accrued interest, but she undoubtedly borrowed far less than $327,000. In fact, McDade argued that the accrued interest on her debt should be discharged even if her underlying loans were not forgiven. But Judge Flatley rejected that argument.

I think Judge Flatley suspected that some of Ms. McDade's expenses were excessive. He pointed out that her expenses rose 20 percent over a ten-month period and that the increase coincided with a pay raise she got at her job. And in fact, she listed a couple of arguably questionable expenses: a $486 monthly car payment and charitable contributions totally $525 a month. She also listed expenses related to her adult daughter.

But McDade was driving a 2014 Jeep Patriot--a very modest car. No bankruptcy court has said student-loan debtors are required to drive a junker in order to qualify for bankruptcy. And if some of McDade's expenses were excessive--the charitable contributions, for example--Judge Flatley might have granted her a partial discharge to compensate for the excessive expenditures. This is what Judge Pappas did in the McDowell case. (Ms. McDowell had purchased a motorcycle.)

Undoubtedly, Ms. McDade can keep her head above water financially if she enters an income-driven repayment plan (IDR) that will require her to make relatively modest monthly payments.  If she goes that route, however, her payments almost certainly will be insufficient to cover accruing interest on her enormous student-loan debt. And an IDR will require her to make monthly payments for 20 or even 25 years.

Ms. McDade may have made some mistakes in the way she handled her student loans, but denying her bankruptcy relief will not accomplish anything useful. She will probably wind up making monthly payments under an IDR until she reaches retirement age, and these payments will hinder her ability to buy a home or save for her retirement.

In fact, Patricia McDade is one of many student-loan debtors who have entered bankruptcy court owing far more than they borrowed due to accrued interest and fees. In my view, it is not in the public interest to shove all these unfortunate individuals into IDRs just to maintain the fiction that the loans aren't in default.

For all practical purposes, Ms. McDade's student loans are in default, and they will remain in default even if she enters an IDR and faithfully makes monthly payments for the next quarter century.

Photo credit: lend.edu


References

McDade v. Direct Subsidized Consolidated Loan, Case No. 15-bk-52, Adv. Proc. No. 15-ap-27 (Bankr. N.D. Va. 2017).

McDowell v. Educational Credit Management Corporation, Bankruptcy Case No. 10–40845–JDPAdv. Proceeding No. 14–08005–JDP, 2016 WL 2603552 (Bankr. D. Idaho 2016).


Saturday, July 15, 2017

A single mother of three children gets a bankruptcy discharge of her student loans: Price v. Betsy DeVos and U.S. Department of Education

Kristin Price, a single mother of three young children, won an important victory in a Pennsylvania bankruptcy court last month. On June 23, Judge Eric Frank issued an opinion discharging all of Ms. Price's federal student loans--approximately $26,000. This is another win for the good guys.

Price v. DeVos and the U.S. Department of Education: A single mom files for bankruptcy

At the time of trial, Ms. Price was 29 years old and had three children ages 3, 5 and 11. Although she was still married, she was separated from her husband and anticipated a divorce.

Price obtained a Bachelor of Science degree in Radiology Science from Thomas Jefferson University in 2011, financing her studies with federal and private loans.  At the time of trial, she worked part-time as a vascular sonographer but was unable to find full-time work in her field. She testified she could obtain a second part-time job working outside her field but the additional child care costs did not justify that option.

Price received informal child support from her estranged husband, but her reasonable expenses still exceeded her income. She testified that she lived with her mother in return for paying her mother's mortgage payment--about $1400 a month.

At the time Price filed her adversary complaint in the bankruptcy court, she owed nearly $26,000 in federal loans and $30,000 to Chase Bank.  Price settled with Chase prior to trial. Thus the only issue before Judge Frank was whether Price was entitled to have her federal loans discharged.

Judge Frank applied the three-part Brunner test to rule for Ms. Price

Judge Frank applied the three-part Brunner test to decide Price's case. The Department of Education conceded that Price passed the first prong of the Brunner test; she could not pay back her federal loans and maintain a minimal standard of living.

The Department also conceded that Price passed Brunner's third prong. It acknowledged that she had handled her student loans in good faith.

But DOE argued that Price could not pass Brunner's second prong. According to DOE, Price could not show additional circumstances making it likely that her financial situation would not improve "for a significant portion of the repayment period of the student loans." Basically, DOE maintained that Price was young and healthy and was qualified for a good job in the medical field. Eventually, DOE pointed out, Price's children would grow up and leave the home, which would enable Price to get a better job and repay her student loans.

And here is where Judge Frank's opinion gets interesting. Price argued that her future financial prospects should be considered for no longer than the remaining period of her 10-year loan repayment obligation, which ended in 2024. DOE argued that Judge Frank should consider Price's financial prospects for a much longer time--the 20- or 25-year period of an income-based repayment plan.

Fortunately for Price, Judge Frank did not buy DOE's argument. The judge ruled that Price had rejected a long-term income-based repayment plan in good faith; and thus he would consider her financial prospects based on the terms of her ten-year repayment obligation and not the 20 or 25 years DOE requested.

Judge Frank said he was obligated to consider Price's future financial prospects based on "specific articulable facts, not unfounded optimism." If he were required to consider Price's financial situation over a 20- or 25-year term, Judge Frank reasoned, his determination "[would] be nothing more than mere guesswork, without any reasonable degree of certitude."

Moreover, Judge Frank pointed out, DOE's own expert testified that DOE's 20-year REPAYE program was ill-suited for Price and that he would not recommend it for her. Judge Price also noted that a REPAYE plan would require Price to consolidate her debt, which would cause accrued interest to be capitalized into a larger loan balance--meaning she would be "paying interest on interest."

If Price's meager income did not improve significantly in later years, Judge Frank explained, her loan would eventually "reach a kind of 'escape velocity,'" meaning that her monthly payments would not be enough to cover accruing interest and her loan balance would grow "for the next several decades."

Based on this analysis, Judge Frank then considered what Price's financial prospects would likely be over the next five years--about 70 percent of the remaining repayment period. The judge concluded Price would probably be unable to pay back her loans over that period.

In short, after applying the second prong of the Brunner test to Price's financial outlook, the judge discharged all of Price's federal loans.

Without question, the heart of Judge Price's ruling was based on his conclusion that Price had rejected a long-term payment period in good faith. And of course, his decision was made a lot easier due to the fact that DOE's own expert admitted that a long-term repayment plan was not appropriate for her.

What does the Price decision mean for other overburdened student-loan debtors?

 Judge Frank's Price decision is significant for at least three reasons:

 First, this is the most recent in a string of bankruptcy court decisions that have discharged student-loan debt owed by single mothers with dependent children. Price follows in the wake of Lamento, Acosta-Conniff (on appeal), Fern, and McDowell--all decisions involving single mothers with children who won discharges or partial discharges of their student loans.

Second, this is the latest in a series of very well-reasoned bankruptcy court decisions in which bankruptcy judges have worked hard to grant relief to overburdened debtors within the harsh constraints of the Brunner test. Judge Frank's decision was 25 pages long; Judge Berger's decision in the Johnson case out of Kansas was extensively researched. The Abney decision, the Fern decision, and several more have displayed remarkable intellectual agility and commendable commitment to the bankruptcy courts' core purpose, which is to grant overburdened debtors a fresh start in life.

Third, Judge Frank ruled that when a court applies the second prong of the Brunner test to determine whether  a debtor's financial prospects will improve in the future, the appropriate time period for consideration is the original term of the loan (generally 10 years) rather than the extended term of a hypothetical 20-year or 25-year income-based repayment plan.

Admittedly, Judge Frank's conclusion on this last point is a little fuzzy. Price had refused to sign up for a long-term, income-based repayment plan, and Judge Frank ruled that Price's decision to reject such a plan had been made in good faith. Judge Frank might have ruled differently if Price had signed up for a 20-year REPAYE plan before filing for bankruptcy.

Indeed, the judge wrote that the "outcome may well be different in other cases in which the extended loan repayment programs present a more attractive option, or for other appropriate reasons." And the judge also noted that DOE did not dispute the fact that Price's decision to reject a long-term repayment plan had been made in good faith.

In the final analysis, all we can say for sure about the Price decision is this: A healthy 29-year old mother of three children with good future job prospects won a bankruptcy discharge of her student loans based primarily on the fact that her judge did not think Price would be in a position to repay her loans over the next five years.

Personally, I would have liked the Price decision better if Judge Frank had said that a student-loan debtor's financial prospects should always be limited to the term of the original student loan--generally no more than 10 years. That's not what the judge ruled. Nevertheless, it is a good decision for student-loan debtors.

References



Acosta-Conniff v. ECMC [Educational Credit Management Corporation], 536 B.R. 326 (Bankr. M.D. Ala. 2015), reversed550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).
Richard Fossey & Robert C. Cloud. Tidings of Comfort and Joy: In an Astonishingly Compassionate Decision, a a Bankruptcy Judge Discharge the Student Loans of an Alabama School Teacher Who Acted as Her Own Attorney. Teachers College Record, July 20, 2015. ID Number: 18040.

In re Lamento, 520 B.R. 667 (Bkrtcy. N.D. Ohio 2014).

Price v. U.S. Department of Education, ky. No. 15-17645 ELF, Adv. No. 16-0011, 2017 Bankr. LEXIS 1748 (Bankr. E.D. Pa. 2017).


McDowell v. Educational Credit Management Corporation, 549 B.R. 744, 774 (Bankr. D. Idaho 2016).