Tuesday, May 17, 2016

The Department of Education almost always fights bankruptcy relief for distressed college-loan borrowers--even when it pointless to do so: You'll never get out of this world alive.

I'll never get out of this world alive.
Hank Williams

Last July, Lynn Mahaffie, Deputy Secretary of Education, issued an insincere letter regarding the Department of Education's position concerning bankruptcy relief for college-loan debtors.

In that letter, Mahaffie outlined when DOE would not oppose bankruptcy relief for student-loan borrowers. She listed eleven factors to consider when determining when DOE would agree to permit a bankrupt debtor to discharge student loans in a bankruptcy court. Besides, Mahadffie said the Department would not oppose a bankruptcy discharge if it would not make economic sense to fight a student-loan borrower's petition for relief.

But in fact, Mahaffie wasn't telling the truth. Bankruptcy court opinions decided after Mahaffie wrote her letter show that DOE opposes bankruptcy relief for almost everyone--even when it is evident a debtor will never repay his or her college loans.

Let's review Kelly v. U.S. Department of Education, decided less than two months ago. Cynthia Kelly, a woman in her sixties, filed for bankruptcy in August 2014. At the time of her filing, Kelly had accumulated $160,000 in college-loan debt; and she had had no steady employment for almost 10 years. In fact, she was receiving nearly $200 a month from the local Department of Social Services in food assistance.

Before filing, Kelly was approved for an "Income-Contingent Repayment Plan" (ICRP) that reduced her monthly student-loan payment obligation to zero because her income was so low. Based on her employment history, it seems highly unlikely that Kelly will ever be required to pay a single penny on her student loans under her ICRP because she will probably live at the poverty level for the rest of her life.

Nevertheless, the Department of Education opposed Kelly's bankruptcy application to discharge her student loans, and Judge David Warren, a North Carolina bankruptcy judge, refused to release her from the debt. In the judge's view, Kelly failed the second prong of the Brunner "undue hardship" test because she could not show "additional circumstances" that precluded her from paying back her loans in the future.

Indeed, Judge Warren was totally unsympathetic to Ms. Kelly's situation.  The judge pointed out that Kelly had taken out student loans over a period of 40 years and had paid almost none of it back (less than $2,300).  Moreover, she had left a secure job with a pharmaceutical company in 2004 to do community service work and had never had steady employment since that time. Although Kelly argued that she had made diligent efforts to find remunerative work, Judge Warren ruled that there was no evidence that she had ever "pounded the payment" to find a job.

Judge Warren pointed out that Kelly appeared to be in good health and was well educated, having both a bachelor's degree, a master's degree, and a doctorate. He seemed offended by the fact that a highly educated person was getting food assistance.  Kelly's "lack of desire and motivation is an insult to those similarly situated," the judge observed, "especially to those lacking the gift of an education." In the judge's opinion, this insult was further compounded "by [Kelly's] complacent acceptance of welfare . . . "

I fully agree with Judge Warren that Kelly is not an attractive candidate for bankruptcy relief.  As the judge pointed out, Kelly took out student loans for nearly 40 years to obtain a lot of post-secondary education. Yet, she chose to live a "voluntary lifestyle" of community service rather than make reasonable efforts to maximize her income.

But let's face it. Ms. Kelly (or Dr. Kelly) will never pay off $160,000 in student loans. Her ICRP requires her to pay nothing due to her poverty-level income. It is totally unrealistic to believe that a woman in her sixties who hasn't held a steady job in ten years will obtain a well-paying job in today's economy.

Moreover, the colleges and universities that took Ms. Kelly's tuition money over a forty-year period bear a good deal of the blame for the situation Kelly is in now. According to Judge Warren, Kelly enrolled at multiple institutions, including Stone School, University of New Haven, Southern New Hampshire University, Spelman College, Drew University, South New Hampshire University, University of Mount Olive, and Shaw University.

Perhaps Kelly is not deserving of bankruptcy relief, but denying her that relief will not get the taxpayers' money back. The Department of Education would be more honest with taxpayers if it allowed people in Kelly's position to shed their debt in a bankruptcy court and then took steps to prevent colleges all over the United States from enrolling students in programs that will never pay off financially.

But that will never happen because the colleges can't survive without federal student-aid money, including money they get from admitting students to programs that have no economic benefit for the people who complete them.


Kelly v. U.S. Department of Education, 548 B.R. 99 (Bankr. E.D.N.C. 2016).

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.

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