Christian Clavell, a 35-year-old sales employee with Coca-Cola, filed for bankruptcy in the hope of discharging $96,000 in student loans. The U.S. Department of Education opposed his application for relief, arguing that Clavell could afford to make loan payments of $492 a month under REPAYE, one of DOE's long-term, income-based repayment plans.
At first blush, DOE's position seems reasonable. Clavell was projected to have an income of $77,000 a year, he was single, and he lived inexpensively in his grandfather's home. Fortunately for Clavell, however, Judge Michael E. Wiles, dug deeper into Clavell's financial situation and concluded that he was entitled to a partial discharge of his student loans that only requires him to make loan payments of $250 a month over a 25-year term.
In reaching his decision, Judge Wiles endorsed the views expressed by Bankruptcy Judge Cecelia G. Morris in Roseberg v. New York State Higher Education Services Corporation. Like Judge Morris, Judge Wiles rejected the "certainty of hopeless" standard that some bankruptcy judges have adopted to justify their decisions to deny relief to distressed student-loan borrowers.
And, like Judge Morris, Judge Wiles called for a less harsh interpretation of the Second Circuit's Brunner opinion. Brunner has been used by bankruptcy judges all over the country to make it virtually impossible for honest but unfortunate student-loan debtors to obtain the "fresh start" that the bankruptcy courts were established to provide. Together, Rosenberg and Clavell signal the possibility that bankruptcy judges would like to see the Brunner test softened by the federal appellate courts.
In analyzing Clavell's claim, Judge Wiles applied the three-part Brunner test, first articulated by the Second Circuit Court of Appeals. Part one of that test required Clavell to show that he could not pay off his student loans and still maintain a minimal standard of living.
Judge Wiles pointed out that Clavell made child-support payments of $946 a month and that DOE did not take this obligation into consideration when it calculated how much Clavell would have to pay under the REPAYE plan. In Judge Wiles' view, DOE's calculations were "too mechanical" and did not take into account Clavell's actual financial circumstances" (p. 10).
Furthermore, the judge noted, REPAYE is actually a misnomer. "[T]he mere fact that the REPAYE payments are low, or in some cases even zero, does not really mean that a debtor can afford to 'repay' the underlining loans" (p. 11). On the contrary, the fact that some people are eligible to make lower payments on their student debts under REPAYE may actually show that these people cannot afford to repay their underlying loans.
Looking at Clavell's expenses, Judge Wiles subtracted Clavell's child-support payments to determine his take-home pay--only $3,242 a month. The judge concluded that Clavel's modest contributions to his retirement plan ($121 a month) were reasonable expenses and not a "luxury" item as DOE maintained.
I disagree with the DOE's contention that modest 401(k) contributions of the kind at issue here are "luxury" items. One of the financial obligations of a responsible adult is to make reasonable provisions for the future, both for the adult's own good and for the good of his or her family. (p. 20)Indeed, Judge Wiles reasoned, "[r]equiring a debtor to forego making reasonable provisions for his and his family's future living expenses would itself be an 'undue hardship,' even if it would not immediately deprive the debtor of food or shelter" (p. 20).
At the time of trial, Clavell lived with his grandfather, paying him $956 per month in rent. DOE argued that Clavell's "real" rent obligations were less than $956, apparently because Clavell paid rent to a relative. But Judge Wiles rejected DOE's argument, finding that Clavell's rent obligations were reasonable.
Remarkably, Judge Wiles also determined that Clavell's own estimation of his food and housekeeping costs were higher than Clavell himself claimed. Reasonable costs for these items was not $265 a month, as DOE contended, or even $400 a month, as Clavell asserted. Instead, Clavell's reasonable housekeeping costs were $590.
In sum, taking all of Clavell's reasonable expenses into account, the judge concluded that Clavell could not maintain a minimal standard of living if forced to repay his student loans.
Turning to part two of the Brunner test, Judge Wiles ruled that Clavell had met his burden of showing that his financial circumstances were not likely to change over "a substantial portion of the loan repayment period" (p. 36). Although Clavell might make more money if he obtained a job in his chosen field of law enforcement, Clavell had not been able to get such a job, and the judge found no evidence to suggest that Clavell had not made a good-faith effort to maximize his income.
Finally, Judge Wiles concluded that Clavell had handled his student-loan obligations in good faith, and thus, he met part three of the Brunner test. The judge acknowledged that Clavell had made no payments on his student loans since he consolidated them in 2013. Nevertheless, Judge Wiles reasoned, "a debtor's 'good faith' must be determined based on the situation in which the debtor found himself."
In Clavell's case, Judge Wiles observed:
[T]he loan servicers themselves recognized that Mr. Clavell's circumstances did not permit him to make payments and thus they suspended Mr.Clavell's payment obligations and put the loans in forbearance as a result. In fact, Mr. Clavell never defaulted on his student loans. Instead, his payment obligations have been suspended. Mr. Clavell's failure to make payments was hardly a sign of "bad faith" when the lender acknowledged that Mr. Clavelll could not make such payments and when the lender agreed to suspend his obligation to make them. (p. 37)Good faith, Judge Wiles ruled, should be measured by a debtor's efforts to obtain employment, maximize his income, minimize expenses, and undertake all other reasonable efforts to repay his student' loans.
The evidence shows that Mr. Clavell did his best to maximize his employment opportunities and his income and to minimize his expenses. He attempted to find a position in law enforcement but was unable to do so despite diligent efforts. He has worked in a sales position and . . . there is no suggestion that he passed up any better opportunities that were available. He has a large child support obligation that he must honor and other reasonable expenses that do not permit him both to maintain a minimal standard of lving and to repay his loans. (p. 37).Accordingly, Judge Wiles reduced the amount of Clavell's loan balance such that Clavell would pay off the remaining debt in an amount that could be paid in 25 years with monthly payments set at $250 per month.
Clavell v. U.S. Department of Education is important for several reasons:
First, Judge Wiles endorsed the view of Judge Cecelia G. Morris in the Rosenberg decision that the Brunner test has been interpreted too harshly by many bankruptcy judges. Judge Wiles flatly rejected the "certainty of hopelessness test" that some bankruptcy courts have adopted to justify their decisions to deny overburdened debtors relief from their student-loan debts.
Second, Judge Wiles ruled that a student debtor's child-support payments should be taken into account when determining whether the debtor can maintain a minimal standard of living and still pay off student loans. Judge Wiles also ruled that a student-loan debtor is entitled to make modest contributions to his or her retirement plan and that such payments are not a luxury.
Finally, and perhaps most importantly, Judge Wiles ruled in Clavell's favor regarding the fact that Clavell had not made monthly loan payments while his loans were in forbearance. The judge concluded that DOE's decision to grant Clavell a forbearance from making payments constituted evidence that DOE itself acknowledged that Clavell was unable to repay his student loans while maintaining a minimal standard of living.
Clavell v. U.S. Department of Education, No. 15-12343, Adv. Pro. No. 16-01181 (Bankr. S.D.N.Y. Feb. 7, 2020).
Rosenberg v. New York State Higher Education Services Corporation, 18-35379, 2020 LEXIS 73 (Bankr. S.D.N.Y. Jan. 7, 2020).
|Bankruptcy Judge Michael E. Wiles|