Vicky Jo
Metz borrowed $16,613 back in the 1990s to attend a community college, but she
never got a degree. Over the years, she filed for bankruptcy three times, but
she continued making payments on her student loans under court-approved repayment
plans. In fact, she paid almost 90 percent of what she originally borrowed.
Nevertheless, Metz's student-loan debt kept
growing due to accruing interest. By 2018, her total debt had grown to $67,277--four
times what she borrowed.
In 2017, Metz commenced an adversary proceeding
in a Kansas bankruptcy court, seeking to discharge her student loans. Her
creditor, Educational Credit Management Corporation (ECMC), objected to a
discharge. Put Metz in an income-based repayment plan (IBRP), ECMC demanded.
But Bankruptcy Judge Robert Nugent disagreed.
Metz, who was 59 years old, would never pay off her student loans under an
IBRP, Judge Nugent reasoned. On the contrary, if Metz entered a 25-year IBRP
and faithfully made her income-based monthly payments, her debt would continue
to grow due to accruing interest. By the time Metz completed her repayment
plan, she would owe $157,277—nine times
what she borrowed! Although her student-loan debt would be forgiven after
25 years of making payments, Metz would face significant tax liability because the
IRS considers forgiven debt as taxable income.
Judge
Nugent granted Metz a partial discharge of her student loans. He canceled all
the accrued interest on her student debt but required her to pay the original
$16,613.
ECMC appealed Judge Nugent's decision to a
federal district court, and Judge John Broomes upheld Judge Nugent's ruling.
Like Judge Nugent, Judge Broomes applied the three-part Brunner test
to determine whether it would be an undue hardship for Metz to repay her
student loans.
In Judge Broomes' view, Metz could not
repay her student loans and maintain a minimal standard of living. Thus, she
met part one of the Brunner test.
Moreover, she met part two of Brunner because
her financial situation was not likely to change. Finally, in Judge Broomes’
view, Metz met part three of the Brunner test
because she had handled her student loans in good faith.
In its
appellant’s brief, ECMC renewed its argument that Metz should be placed in an
IBRP and downplayed the tax consequences of such a plan. Metz would probably
suffer no tax consequences from an IBRP, ECMC argued, because she would likely
be flat broke when her IBRP concluded. Under
current law, ECMC pointed out, individuals pay no federal tax on forgiven debt if
they are insolvent at the time the debt is forgiven.
In a
footnote, Judge Broome pointed out the absurdity of ECMC’s position. “The import
of that argument,” Judge Broome wrote, “is that under ECMC’s plan, [Metz] will
be kept insolvent, if not entirely impoverished, until she is eighty years old
and the debt is forgiven—what a pleasant system.”
Judge
Broomes’ Metz decision is the second
appellate court decision out of Kansas to uphold a bankruptcy court’s partial
discharge of student-loan debt. The first decision, Murray v. ECMC, granted a partial discharge to Alan and Catherine
Murray, a married couple in their late forties, whose student-loan debt had
quadrupled over 20 years due to accruing interest.
Together,
Metz and Murray stand for the proposition that long-term, income-based
repayment plans are not appropriate for insolvent student-loan debtors when it
is clear that debtors in these plans will never pay off their loans. Had ECMC
had its way with Vicky Jo Metz, she would have made monthly student-loan
payments for a quarter of a century—until she was in her eighties. At that point, she would face a huge tax bill
for $150,000 in forgiven debt or she would be insolvent. As Judge Broome
remarked: What a pleasant system.
References
Educational
Credit Management Corporation v. Metz, Case No. 18-1281-JWB
(D. Kan. May 2, 2019).
In
re Murray, 563 B.R. 52 (Bankr. D. Kan 2016); aff’d sub nom. Educational Credit Management Corporation v. Murray, No 16-2838,
2017 WL 4222980 (D. Kan. Sept. 22, 2017).
