Showing posts with label Abney v. U.S. Department of Education. Show all posts
Showing posts with label Abney v. U.S. Department of Education. Show all posts

Sunday, August 5, 2018

Martin v. ECMC: Iowa bankruptcy judge discharges unemployed lawyer's student loans

In Martin v.  Educational Credit Management Corporation (ECMC), decided last February, Janeese Martin obtained a bankruptcy discharge of her student-loan debt totally $230,000. Judge Thad Collin’s decision in the case is probably most significant for the rationale he articulated when he rejected ECMC’s argument that Martin should be placed in a 20- or 25-year, income-based repayment plan (IBRP) rather than given a discharge.

Citing previous decisions, Judge Collins said an IBRP is inappropriate for a 50-year-old debtor who would be 70 or 75 years old when her IBRP would come to an end. An IBRP would injure Martin’s credit rating and cause her mental and emotional hardship, the judge wrote. In addition, an IBRP could lead to a massive tax bill when Martin's plan terminated in 20 or 25 years, when she would be "in the midst" of retirement.

Janeese Martin, a 1991 law-school graduate, is unable to find a good law job

Janeese Martin graduated from University of South Dakota School of Law in 1991 and passed the South Dakota bar exam the following year. In spite of the fact that she held a law degree and a master's degree in public administration, Martin never found a good job in the field of law. 

Martin financed her undergraduate studies and two advanced degrees with student loans totally $48,817. In 1993, she consolidated her loans at an interest rate of 9 percent; and she made regular payments on those loans from 1994-1996. 

Over the years, there were times when Martin could make no payments on her student loans, but she obtained various kinds of deferments that allowed her to skip monthly payments while interest accrued on her loan balance. By 2016, when Martin and her husband filed for bankruptcy, her student-loan debt had grown to $230,000--more than four times what she borrowed.

As Judge Collins noted in his 2018 opinion, Janeese Martin was 50 years old and unemployed. Her husband Stephen was 66 years old and employed as a maintenance man and dishwasher at a local cafe. The couple supported two adult children who were studying at the University of South Dakota and had student loans of their own. The family's annual income for 2016 was $39,243, which came from three sources: Stephen's cafe job, his pension and his Social Security income.

Judge Collins reviewed Janeese's petition to discharge her student loans under the "totality of circumstances" test, which is the standard used by the Eighth Circuit Court of Appeals for determining when student loans constitute an "undue hardship" and can be discharged through bankruptcy. 

Martin's Past, Present, and Reasonably Reliable Future Financial Resources

Judge Collins surveyed Martin's employment history since she completed law school. In addition to three years working for a legal aid clinic, Martin had worked eight years with the Taxpayer's Research Council, a nonprofit agency located in Iowa.  Her maximum salary in that job had paid only $31,000, and Martin was forced to give up her job in 2008 when her family moved to South Dakota.

ECMC, which intervened in Martin's suit as a creditor, argued that Martin had only made "half-hearted" efforts to find employment, but Judge Collins disagreed. Martin "testified very credibly that she wants to work and has applied for hundreds of jobs," Judge Collins wrote. Nevertheless, in the nine years since her last job, Martin had only received a few interviews and no job offers. 

Judge Collins acknowledged that Martin had two advanced degrees, but neither had been acquired recently. In spite of her diligent efforts to find employment, the judge wrote, she was unlikely to find a job in the legal field that would give her sufficient income to make significant payments on her student loan.

Martin's Reasonable and Necessary Living Expenses

Judge Collins itemized the Martin family's monthly expenses, which totaled about $3,500 a month. These expenses were reasonable, the judge concluded, and slightly exceeded the family's monthly income. Virtually all expenses "go toward food, shelter, clothing, medical treatment, and other expenses reasonably necessary to maintain a minimal standard of living," Judge Collins ruled, and "weigh in favor of discharge" (p. 893).

Other Relevant Facts and Circumstances

ECMC argued, as it nearly always does in student-loan bankruptcy cases, that Martin should be placed in a 20- or 25-year income-based repayment plan rather than given a bankruptcy discharge. The Martin family's income was so low, ECMC pointed out, that Martin's monthly payments would be zero. 

Judge Collins' rejected ECMC's arguments, citing two recent federal court opinions: the 2015 Abney decision, and Judge Collins' own 2016 decision in Fern v. FedLoan Servicing. “When considering income-based repayment plans under § 523(a)(8),” Judge Collins wrote, “the Court must be mindful of both the likelihood of a debtor making significant payment under the income-based repayment plan, and also of the additional hardships which may be imposed by these programs” (p. 894, internal punctuation omitted).

These hardships, Judge Collins noted, include the effect on the debtor’s ability to obtain credit in the future, the mental and emotional impact of allowing the size of the debt to grow under an IBRP, and “the likely tax consequences to the debtor when the debt is ultimately canceled” (p. 894, internal citation and punctuation omitted).

In Judge Collins’ view, an IBRP was simply inappropriate for Janeese Martin, who was 50 years old:
If she were to sign up for an IBRP, she would be 70 or 75 when her debt was ultimately canceled. The tax liability could wipe out all of [Martin’s] assets not as she is approaching retirement, but as she is in the midst of it. If [Martin] enters an IBRP, not only would she have the stress of her debt continuing to grow, but she would have to live with the knowledge that any assets she manages to save could very well be wiped out when she is in her 70s. (p. 894)
Conclusion

Martin v. ECMC is at least the fourth federal court opinion which has considered the emotional and mental stress that IBRPs inflict on student-loan debtors who are forced into long-term repayment plans that cause their total indebtedness to grow. Together, Judge Collins' Martin decision, Abney v. U.S. Department of Education, Fern v. FedLoan Servicing, and Halverson v. U.S. Department of Education irrefutably argue that the harm IBRPs inflict on distressed student debtors outweighs any benefit the federal government might receive by forcing Americans to pay on student loans for 20 or even 25 years--loans that almost certainly will never be paid off.



References

Abney v. U.S. Department of Education540 B.R. 681 (Bankr. W.D. Mo. 2015).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

Thursday, March 9, 2017

Dear Secretary Betsy DeVos: Please do the right thing and allow distressed debtors to discharge their student loans in bankruptcy

Dear Secretary DeVos:

You have been Secretary of Education for about  a month, so you know the federal student loan program is in shambles.

Eight million borrowers are in default, millions more aren't making payments while interest accrues on their debt, 5.6 million people have signed up for income-driven repayment plans and are making payments so small that their debt is negatively amortizing even though they are faithfully making regular payments.

Obviously, there are dozens of things the Department of Education can do to address this crisis, but you can easily do one thing to help alleviate mass suffering and it is this: Please direct DOE and all its student-loan debt collectors to stop opposing bankruptcy relief for distressed student-loan borrowers.

In 2015, Deputy Secretary Lynn Mahaffie issued a letter stating DOE and its debt collectors would not oppose bankruptcy relief for student-loan debtors if it made no economic sense to do so. But in fact, both the Department and its agents oppose bankruptcy relief in almost every case.

And here are just a few examples:
  • In Myhre v. U.S. Department of Education, the Department opposed bankruptcy relief for a quadriplegic who worked full time but could not make student-loan payments and still pay the full-time caregiver he needed to dress him, feed him, and drive him to work.
  • In Abney v. U.S. Department of Education,  DOE urged a bankruptcy court to put a destitute student borrower into a long term payment plan even though the debtor was living on $1200 a month and was so poor he could not afford to drive a car and was riding a bicycle to work.
  • In Roth v. Educational Credit Management, ECMC fought an elderly woman's efforts to shed her student loans even though the woman had a monthly income of less than $800 a month and suffered from several chronic health problems.
  • In Edwards v. Educational Credit Management Corporation, ECMC argued to an Arizona bankruptcy judge that a 56-year-old counselor who owed $245,000 in student loans should be put in a 25-year repayment plan whereby she would make token payments until she was 81 years old!
Some of these cases were decided before Mahaffie's 2015 letter and some were decided after, but the dates are immaterial. DOE and its agents almost always oppose bankruptcy relief for student-loan debtors, no matter how desperate their circumstances.

In fact, DOE's position is essentially this: NO STUDENT DEBTOR IS ENTITLED TO BANKRUPTCY RELIEF. Instead, everyone should be placed in income-driven repayment plan  (IDR) that can last for 20 or even 25 years.

But you could change DOE's position simply by signing your name to a single letter. That letter should say that DOE and its debt collectors will no longer oppose bankruptcy relief for student debtors who cannot pay back their college loans and still maintain a minimal standard of living. And DOE will no longer argue that IDRs are a reasonable alternative to bankruptcy relief.

If you did that, hundreds of thousands of insolvent college-loan borrowers could discharge their student debt in bankruptcy and get a fresh start--a fresh start the bankruptcy courts were established to provide.

Your advisers may argue that the IDR program offers college borrowers a reasonable way to ultimately pay off their student loans, but that's not true. Do you think Rita Edwards would have ever paid back the $245,000 she owed the government by making payments of $81 a month in an IDR as ECMC proposed in her bankruptcy case? Of course not.

Do you think Janet Roth would have ever paid back her student-loan debt of $90,000 if she had been put in an IDR that would have set her monthly payments at zero due to her low income? No, and it was absurd for ECMC to have made that argument in Roth's bankruptcy case.

The stark reality is this. Millions of student borrowers have seen their loan balances double, triple and even quadruple due default fees and accruing interest. Putting these people into 20 and 25-year repayment plans that only require them to make token payments is insane.

Secretary DeVos, you could eliminate so much suffering if you would simply write a letter stating that DOE will no longer oppose bankruptcy relief for people like Myhre, Edwards, Roth, Abney and millions of other people in similar circumstances who will never pay back their student loans.

Please do the right thing.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Annual Report of the CFPB Student Loan Ombudsman. Consumer Financial Protection Bureau, September 2016.

Ann Carrns. How to Dig Out of Student Loan Default. New York Times, October 21, 2016.

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.

Edwards v. Educational Credit Management Corporation, Adversary No.. 3:15-ap-26-PS, 2016 WL 1317421 (Bankr. D. Ariz. March 31, 2016).

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

Myhe v. U.S. Department of Education, 503 B.R. 698 (Bankr. W.D. Wis. 2013).

Roth v. Educational Credit Management Corporation490 B.R. 908 (9th Cir. BAP 2013). Available at http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf

Matt Sessa. Federal Student Aid Posts Updated Reports to FSA Data Center. U.S. Department of Education Office of Student Aid, December 20, 2016.

Sunday, March 5, 2017

Edwards v Navient: A single mom's private student loans are discharged in bankruptcy but not her federal loans

Edwards v. Navient Solutions, Inc., decided last November, contains both good news and bad news for distressed student loan debtors.

The good news is this: Paula Maxine Edwards, a single mother of two children, was able to discharge $56,640 in private student loans under the Bankruptcy Code's "undue hardship" standard. Judge Janice Miller Karlin, a Kansas bankruptcy judge, ruled that Edwards had managed her private loans in good faith, in spite of the fact she had made only a few payments on them.

And this is the bad news: Judge Karlin ruled that Edwards could not discharge $72,000 in federal student loans because Edwards was eligible to enter an income-driven repayment plan (IDR) that allowed her to make loan payments based on her income over a 20-year span.  At her current income, Edwards would only be obligated to pay $21 a month. Obviously, this token monthly payment will not cover accruing interest on $72,000, which means Edwards will never pay off her federal loans.

The Edwards case: Another chronicle of student-loan misery

Paula Edwards, age 36, obtained a bachelor's degree in education from Newman University, a small Catholic college located in Wichita, Kansas. Newman University is expensive; currently, tuition and fees total about $28,000 a year. Although Edwards worked as a paralegal while she was in school and took no unnecessary courses, she wound up owing $151,000 in student loans.

Edwards' degree from Newman qualified her for a job as an elementary school teacher. At the time of her bankruptcy proceedings, she was in her fourth year as a teacher, and her annual salary was only $35,300. Unless Edwards obtains more education, which she cannot afford, her salary is capped at $35,700.

Edwards' student-loan debt fell into two categories. First, she borrowed $72,000 in federal student loans, which were eligible for modified payment terms. Second, she took out  private loans totally $56,640 from Navient Solutions. Her private loans contained no provision for modified payment terms and bore interest at the rate of 9.75 percent. (She also borrowed $8,354 from Navient for Stafford loans, which she did not attempt to discharge).

Judge Karlin refused to discharge Edwards' federal loans. The Department of Education represented that Edwards was eligible to participate in the Department's REPAYE program, which allowed her to make payments based on her income over 20 years. At her current salary, DOE told the court, Edwards would only be obligated to make payments of $21 a month.  Edwards admitted she could make payments in this amount, and this debt was not discharged.

Applying the Brunner test, Judge Karlin discharged Edwards' private student loans

However, Judge Karlin discharged Edwards' private loans owed to Navient. The judge noted that private loans, unlike federal loans, contain no provisions for alternative repayment plans such as REPAYE. Applying the three-pronged Brunner test, Judge Karlin concluded that repaying the private loans would be an undue hardship for Edwards.

Judge Karlin ruled that Edwards met the first prong of the Brunner test, which required her to show she could not maintain a minimal standard of living if she were forced to pay back her private loans. Moreover, in Judge Karlin's opinion, Edwards met Brunner's second prong by showing that her financial situation was not likely to improve any time soon. As the judge pointed out, Edwards worked in a low-paying profession, and it was "highly unlikely" that Edwards' salary would increase significantly.

Finally, and perhaps most importantly, Judge Karlin ruled that Edwards met the third prong of the Brunner test, which obligated her to show she had made a good faith effort to repay her student loans. Although Edwards had made no payments on her private student loans over the previous six years, her payment history did not preclude a good faith finding.

As Judge Karlin explained, the Brunner test "requires the Court to determine if the debtor has made a good faith effort to repay the loan as measured by his or her efforts to obtain employment, maximize income and minimize expenses . . . .  A finding of good faith is not precluded by a debtor's failure to make a payment."

In Judge Karlin's view, Edwards had demonstrated "that she was really unable to make anything but a de minimus payment, if at all, on her student loans during the last six years." While it was true, the judge acknowledged, that Edwards had received tax refunds from time to time, good faith was not precluded by the fact that she had used the refunds to meet other pressing financial obligations rather than apply the refunds to her student loans.
[W]hile it would be better for her case had she paid even $10 a month from her tax refunds, in light of her life situation--attempting to raise two children on her own with very little child support, and with a small income even giving her teaching degree--her minimal efforts should qualify under the totality of circumstances. There was no evidence she willfully or negligently caused her own default, and the Court does not believe she did.
Conclusion: A Pyrrhic victory 

Edwards v. Navient Solutions, Inc. is a mixed bag for student-loan debtors. On the positive side, the court interpreted the "good faith" prong of the Brunner test in a sensible way. A debtor's good faith is not determined by the number of loan payments made but rather on whether the debtor made good faith efforts to repay student loans by maximizing income and minimizing expenses. In Judge Karlin's view, Edwards met Brunner's good-faith prong even though she made no payments on her private loans for six years.

Unfortunately, Judge Karlin refused to discharge Edwards' federal student loans due at least partly to the fact that Edwards was eligible to participate in REPAYE, which allows Edwards to make minimal payments of only $21 a month based on her current income. Since monthly payments of $21 won't cover accruing interest, Edwards' federal loans will negatively amortize--her debt will grow larger with each passing year.

Other courts have rejected creditors' arguments that college debtors should be forced into income-driven repayment plans as an alternative to bankruptcy relief. In the Abney case, the Lamento case and the Halverson case, courts explicitly recognized the psychological stress a long-term repayment plan can put on a debtor.

Paula Edwards won a Pyrrhic victory in a Kansas bankruptcy court. She shed $58,000 in private student-loan debt, but she was forced into a long-term repayment plan for her federal loans that will require her to make token payments for 20 years. Given Edwards' likely income trajectory, she will undoubtedly owe double the amount she borrowed at the end of the 20 year payment term--not a just outcome for a single mother of two who made a good faith effort to pay off her student loans.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Edwards v. Navient Solutions, Inc., 561 B.R. 848 (Bankr. D. Kansas 2016).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

Thursday, December 31, 2015

These few, these happy few, this band of brothers and sisters: Going into bankruptcy court without lawyers, a few intrepid souls obtained relief from oppressive student-loan debt


And Crispin Crispian shall ne’er go by,
From this day to the ending of the world,
But we in it shall be remembered-
We few, we happy few, we band of brothers . . .


Henry V
William Shakespeare

More than 20 million people have college loans they can't pay back. For most of them, their oppressive debt grows larger every day, as interest continues to accrue. It is now common for people to owe more than three times the amount of money they borrowed for postsecondary education due to interest, penalties and fees that were tacked on to their original loans.

Had these suffering souls borrowed money to purchase a pizza franchise or buy a house, they could discharge their debt in bankruptcy. Likewise, if they were financially crushed by catastrophic medical expenses or a divorce, they could wipe away their debt through the bankruptcy process.

But because they borrowed money to acquire an education, student-loan debtors cannot discharge their debt in bankruptcy unless they meet the "undue hardship" standard set forth in the Bankruptcy Code--a difficult standard to meet.

In fact, most people are so convinced that it is impossible to discharge student loans in bankruptcy that they don't even try.  Jason Iuliano, in a 2012 law review article, researched bankruptcy court records and found that almost a quarter of a million people with student-loan debt filed for bankruptcy in 2007, but less than 300 of them even attempted to discharge their student loans.

And indeed, discharging student loans in bankruptcy is daunting. Debtors are forced to file an adversary action--in essence, a law suit, against their student-loan creditors. 

Because people in bankruptcy generally have no money, they can't afford to hire an attorney to represent them in an adversary proceeding. In contrast. their debtors--the Department of Education, Sallie Mae, or debt collection agencies like Educational Credit Management Corporation--have lots of experienced lawyers to defend their interests.

Nevertheless, a few intrepid student-loan debtors have filed adversary actions in bankruptcy court and have been successful, and many of them proceeded without lawyers. 

Here are three examples:

Alexandra Acosta-Conniff, an Alabama school teacher and single mother of two, filed an adversary proceeding to discharge $112,000 in student-loan debt. On March 25, 2015, a bankruptcy court ruled in her favor, discharging all her student-loan obligations. Acosta-Conniff won her case without a lawyer.

George and Melanie Johnson, a married couple in their thirties with two school-age children, filed for bankruptcy in Kansas, seeking relief from $83,000 in student loans. In February 2015, a bankruptcy court ruled in their favor. Like Acosta-Conniff, the Johnsons won their case without a lawyer.

Educational Credit Management Corporation, perhaps the nation's most ruthless student-loan creditor, was a defendant in both  cases, and ECMC appealed both rulings. But the bankruptcy judges in both cases wrote persuasive and well-researched decisions,and Acosta-Conniff and the Johnsons have good prospects for prevailing on appeal.

Finally, we have Michael Abney, a single father of two, who borrowed $25,000 to pursue an undergraduate degree he never obtained, and was living on less than $1200 a month. He went to bankruptcy court without an attorney and defeated the Department of Education. Abney's case was decided in November of this year. 

These few, these happy few . . . Let us salute the courage of these brave individuals, who went to bankruptcy court without lawyers and were victorious. And let us salute the bankruptcy judges who rose to their duty to give honest but unfortunate debtors a fresh start--which is the very purpose of the American bankruptcy courts. 

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Acosta-Conniff v. Educational Credit Management Corporation, No. 12-31-448-WRS, 2015 Bankr. LEXIS 937 (Bankr. M.D. Ala. March 25, 2015).

Johnson v. Sallie Mae & Educational Credit Management Corporation, Case No. 11-23108, Adv. No. 11-6250, 2015 Bankr. LEXIS 525 (Bankr. D. Kan. Feb. 19, 2015).