Showing posts with label Brunner test. Show all posts
Showing posts with label Brunner test. Show all posts

Saturday, June 4, 2022

Biden Administration Flirts With Sweeping Student-Loan Forgiveness While Dept of Education Treats All Student Debtors Like Deadbeats: I Don't Get It

Earlier this week, the Department of Education wiped away all student debt owed by more than a million former students who attended one of the Corinthian Colleges campuses. The cost? About $5.8 billion.

Since his administration began, President Biden has approved $25 billion in loan forgiveness for 1.3 million student borrowers. That's a lot of student debt relief.

Nevertheless, more than 40 million Americans are still on the hook for a total of $1.7 trillion in student loans. Many of these folks want President Biden to forgive all of this debt

Biden has proposed debt relief of $10,000 per borrower. Progressive Democratic leaders want $50,000 of student-debt relief for all student debtors (with some sort of income cap). Various advocacy groups urge Biden to forgive all student debt, which burdens minority students and women disproportionately.

These proposals presume that every student debtor took out college loans in good faith. No one wants to offer loan relief on a case-by-case basis based on merit or attempt to identify students who may have committed fraud in handling their student loans.

In other words, all debt relief schemes now under discussion take it as a given that everyone--all 45 million borrowers--is honest and entitled to some debt relief. 

I applaud this approach. Only a tiny percentage of student borrowers took out loans to defraud the government. Almost all of them went into debt to get an education they hoped would improve their lives. And many student borrowers weren't able to obtain a job after graduation that paid enough to justify their educational expenses.

So--I am puzzled. Since President Biden and congressional leaders advocate for massive student debt relief without examining each debtor's individual circumstances, why does the  U.S. Department of Education continue harassing distressed college borrowers in the bankruptcy courts?

Let's look at a bankruptcy court decision issued less than three months ago: Everson v. U.S. Department of Education. In that case, Kimberlee Everson took out student loans to get an associate's degree in medical assisting from Bryant Stratton College, a for-profit institution.

She obtained her degree and went to work as a medical assistant for various employers at an hourly rate of between $12.50 to $23 an hour. By the time she appeared in bankruptcy court, her student debt had grown to $45,000--including accrued interest.

Judge Caryl Dilano, a Florida bankruptcy judge, reviewed Ms. Everson's financial status in painstaking detail and refused to discharge her debt. Judge Dilano pointed out that Ms. Everson went out to eat occasionally, had a gym membership, and sometimes made purchases at a liquor store. 

He also heard evidence from the Department of Education that Ms. Everson was eligible for a long-term, income-based repayment plan that would only require her to pay $48 a month on her $45,000 debt.

In Judge Dilano's opinion, Ms. Everson met two prongs of the three-prong Brunner test.  First, it would be an undue hardship for her to pay off her student loans. Second, her precarious financial circumstances were not likely to improve due to factors beyond her control.

Nevertheless, the judge refused to grant Ms. Everson a discharge because she failed the Brunner test's third prong--the good-faith test. He believed Everson had not handled her student loans in good faith. Notably, Judge Dilano pointed out that she had made only minimal payments on her loans over seven years.

The Department of Education has forgiven $25 billion in student debt owed by more than a million people without subjecting any of these debtors to the onerous Brunner test.

How many millions have gym memberships? How many go out to eat occasionally? How many patronize liquor stores?

I don't get it.

If a million and a half people are getting student-debt relief without regard to their payment history or their lifestyles, why is Judge Dilano devoting judicial resources to determining whether Kimberlee Everson dined out too often?

Sources

Everson v. U.S. Department of Education, Case No. 2:20-bk-03062-FMDAdv. Pro. No. 2:20-ap-267-FMD, 2022 WL909570 (M.D. Fla. March 29, 2022).

Senators Warren & Schumer 




Monday, July 26, 2021

In re Standish: Should you be required to use your inheritance to pay off student debt?

 Martha Standish took out student loans when she was in her late 40s to get an undergraduate degree in accounting. Later she took out a Parent Plus Loan to help her daughter with college expenses.

Eleven years after graduating, Standish filed an adversary proceeding in a Kansas bankruptcy court seeking to discharge about $30,000 in student loans. By this time, she was 63 years old. She made $18.36 an hour working at an engineering firm, and her expenses slightly exceeded her income.

Bankruptcy Judge Robert Berger applied the Brunner test in deciding whether Ms. Standish qualified to have her student loans discharged under the Bankruptcy Code's "undue hardship" rule.  To be entitled to a student-loan discharge, Standish was required to make three showings:

1) "[S]he cannot maintain a minimal standard of living for herself and her dependents if forced to repay her student loans."

2)  "[A]dditional circumstances exist indicating that this state of affairs will persist [for] a significant portion of the repayment period . . . ."

3) "[S]he made good faith efforts to repay her loans."

After an extensive analysis, Judge Berger ruled in Standish's favor on two parts of the three-part Brunner test.  

First, he ruled that Standish could not maintain a minimal standard of living and make payments on her student loans. Thus, she met the first part of the Brunner test.

Second, Judge Berger ruled that Standish's dismal economic circumstances were unlikely to improve enough for her to pay off her student loans in the future. "As her age advances and her health deteriorates, she will soon reach a point at which her continuing employment is no longer possible," the judge observed. Moreover, Standish was unlikely to see her income go up. Based on these facts, Judge Berger ruled that Standish met the second part of the Brunner test.

Finally, regarding Brunner's "good faith" prong, Judge Brunner noted approvingly that Standish had "diligently minimized her expenses while maximizing the income she could earn with her degree." She also made payments on some of her loans while deferring others.

Nevertheless, Judge Berger ruled that Standish failed the good-faith prong of the Brunner test. 

Why? Because she received an inheritance and did not use the inheritance money to pay off her student loans. Instead, she used her inheritance to help pay for her daughter's education and other expenses. 

As Judge Berger explained:

[Standish's] decision to dedicate her inheritance to her daughter's education and other expenses prohibits the Court from finding that her pursuit of a discharge is in good faith. [Standish] received around $45,000 from her mother's estate. None of that money was used to pay the student loans. It is notable that this money would have been enough to pay off all or almost all her student loans.

Judge Berger clearly sympathized with Ms. Standish. He ruled in her favor on two parts of the Brunner test and only ruled against her on the good-faith standard because of her inheritance. "It is a tragic irony,' Judge Berger wrote, "that [Standish's] very efforts to relieve her daughter of the financial enserfment caused by student loan debt doomed her effort to discharge her own student loans."

Millions of Americans are burdened by student loans that prevent them from buying a home or saving for retirement. Some are probably counting on an inheritance to offset the catastrophe of their student debt.

But Judge Berger's decision--which is in harmony with current law--should be a wake-up call to student debtors who believe an inheritance will allow them to retire with dignity despite crushing student debt. As the Standish decision illustrates, an inheritance might foreclose bankruptcy relief for student borrowers even if they are otherwise qualified for relief under Brunner.

And--even more chilling to think about--the feds might try to garnish inheritance money from people who defaulted on their student loans. To my knowledge, this has not happened yet, but that possibility should not be discounted. 

Just another reason why Congress should amend the Bankruptcy Code and allow honest debtors to discharge their student loans in bankruptcy like any other nonsecured debt.

References

In re Standish, 628 B.R. 692 (Bankr. D. Kan. 2020).



Friday, April 9, 2021

Tingling v. ECMC: 52-year old student-loan debtor with multiple degrees loses her case before Second Circuit Court of Appeals

Bankruptcy is intended to give honest but unfortunate debtors a fresh start in life. People who mismanage their finances, spend money improvidently or go broke through their own stupidity can shed their debts in a bankruptcy court.

That is a good thing. 

But the Bankruptcy Code contains an exception for insolvent student-loan borrowers. Unless they can show "undue hardship," they can't get free of their college loans. 

The Second Circuit Court of Appeals defined undue hardship in its Brunner decision, rendered in 1987.  To qualify for a discharge of their student loans, debtors must make three showings: 

1) They cannot pay off their loans and maintain a minimum standard of living.  

2) Their financial condition is unlikely to improve over the terms of the loans.

3) They handled their student loans in good faith.  

Some commentators (including me) hope the Second Circuit will reconsider the harsh Brunner test and perhaps overrule it or at least interpret it more humanely.

Unfortunately, Tingling v. ECMCdecided about a month ago, is a signal that the Second Circuit is not willing to abandon Brunner.

Janet Tingling, age 52, tried to discharge student debt accumulated to obtain multiple degrees (a B.S. and M.S. in biology, an M.B.A., and a Doctorate in Business Administration). Her adjusted gross income was about $50,000 before filing bankruptcy. Her total student-loan debt (including principal, interest, fees, and costs) was $59,000.

Tingling was initially represented by a lawyer in her bankruptcy proceedings, but she released her attorney and pursued her adversary action alone.

Bankruptcy Judge Alan S. Trust denied Ms. Tingling's application to shed her student loans, finding that she failed all three parts of the Brunner test. She appealed to U.S. District Court Judge Joanna Seybert, and she upheld Judge Trust's ruling.

Last month, a three-judge panel of the Second Circuit Court of Appeals (Judges Cabranes, Raggi, and Sullivan) upheld Judge Trust's bankruptcy opinion, ruling that he had applied the Brunner test correctly. The panel expressed no interest in modifying or overruling the Brunner standard.

I am not unduly disheartened by the Second Circuit's Tingling decision.  After all, Janet Tingling's situation was not as compelling as that of other more hard-pressed debtors who have wound up in a bankruptcy court. 

The Second Circuit pointed out that she "is of relatively young age (52 years old), in good health, possesses two graduate degrees in healthcare administration, lacks dependents, and, by all indications, is able to maintain her current level of income" (Tingling v. ECMC, 990 F.3d at 309).

I hope another debtor--someone in more desperate circumstances--takes her case to the Second Circuit and challenges the Brunner test.

 And I hope that person is represented by a competent and energetic lawyer.  Ms. Tingling was handicapped, no doubt, by the fact that she fought her case into the appellate courts on her own, without legal counsel to advise and assist her. 



References

Tingling v. Educational Credit Management Corporation, 900 F.3d 304 (2d Cir. 2021).











Thursday, December 17, 2020

Mendenhall v. Navient: Idaho bankruptcy judge grants a family man a partial discharge of student loan debt totally more than $400,00.

Mendenhall v. Navient Corporation: A $76,000 student-loan debt grows fivefold

In 2007, Steven Mendenhall obtained a bachelor's degree in film and video production from Brooks Institute of Photography, a for-profit college in California, which later closed.  To finance his studies, Mendenhall took out about $75,000 in federal student loans and $76,000 in private loans from Sallie Mae.

Mendenhall's private student loans gradually spun out of control. By 2013--six years after graduating, Mr. Mendenhall's private student-loan debt had grown from $76,000 to  $260,357.69--more than three times what he borrowed.  By 2018, his private loan debt had grown to $407,912.84--more than five times what he borrowed.

How did that happen? To begin with, Sallie Mae's interest rate was quite high--13.625 percent. Interest on Mr. Mendenhall's unpaid debt accumulated and capitalized, causing his loan balance to spiral upward.  Also, Sallie Mae charged Mendenhall additional fees--nearly $40,000 in fees as of 2013. That's more than half the amount Mr. Mendenhall borrowed.

Added together then--Mr. Mendenhall's private student-loan debt and his federal debt totaled almost half a million dollars.

Mr. Mendenhall diligently sought employment and finally landed a pretty good job working at Brigham Young University's branch campus in Rexburg, Idaho. He attempted to manage his towering debt by filing for bankruptcy three times. Realizing he could not discharge his student loans absent a showing of undue hardship, Mendenhall filed for bankruptcy twice to discharge his other debts, hoping to free up more money to pay on his student loans. Still, he was unable to pay down his private student-loan debt.

Mendenhall filed his third bankruptcy petition in 2018, hoping to discharge his student loans. He settled with the U.S. Department of Education but still owed over $400,000 to Sallie Mae's successor in interest, Navient.

Judge Joseph Meier grants Mr. Mendenhall a partial discharge of his massive student debt

Idaho Bankruptcy Judge Joseph Meier reviewed Mr. Mendhall's financial situation and concluded that Mendenhall and his wife had lived frugally. The judge specifically approved of Mendenhall's expenditures for life insurance and his contributions to a retirement fund and a small savings account.

In fact, Judge Meier found only two unreasonable expenses--Mendenhall's $400 a month charitable contribution to the family church and his $300 monthly payments on his attorney fees.

After reviewing the totality of Mr. Mendenhall’s income and expenses, Judge Meier concluded that Mendenhall only had $150 a month in available income to pay on his student-loan bill---$407,000, which was accruing interest at the rate of 13.625 percent.

Judge Meier then analyzed Mendenhall’ situation under the three-pronged Brunner test to determine whether Mendenhall and his dependents would suffer an “undue hardship” if he were required to repay his private student-loan debt.

In the Judge’s view, Mendenhall met all three prongs of the Brunner test.  First, he was unable to repay his student loans and maintain a minimal standard of living. Second, his current financial situation was unlikely to change substantially.  And third, Mendenhall had handled his loans in good faith.

After completing his extensive analysis, Judge Meier then gave Stephen Mendenhall a partial discharge of his private student loans. The judge discharged all of this debt except $45,000--a little more than 10 percent of the total amount he owed. This debt could be paid without accruing interest, Judge Meier instructed, in payments of $150 a month over 25 years.

Sometimes a partial student-loan discharge is an appropriate remedy

Judge Meier made the right decision, one that other bankruptcy judges should follow. Granting a partial student-loan discharge gives a judge the flexibility to fashion a reasonable and just remedy for an honest but unfortunate debtor burdened by massive student-loan debt. Such a remedy is particularly appropriate for Mr. Mendhenhall, a husband and father with four children, burdened by student debt that had careened out of control due to a high interest rate and unconscionable fees.

References

Mendenhall v. Navient Corporation, JMM Adversary Case No. 19-8010-JMM, 2020 WL 6557964 (Bankr. D. Idaho Oct. 15, 2020).




Monday, July 6, 2020

Trejo v. U.S. Department of Education: A Texas bankruptcy judge grants student-loan discharge to 47-year-old single mom

The Sad Case of Jessica Trejo

In 2017, Jessica Trejo filed an adversary action in a Texas bankruptcy court, seeking to discharge $90,000 in student-loan debt. Ms. Trejo had borrowed about $65,000 to attend three Texas colleges. She also took out a Parent Plus loan for $13,522 to help pay for her eldest daughter's college education. And she owed a little over $7,000 in accrued interest.

At the time of trial, Ms. Trejo was a 47-year-old single mother with two dependent daughters. Both daughters were "afflicted with serious Type II diabetes, high blood pressure, psoriasis, eating disorders, severe depression, suicidal tendencies, and Attention-Deficit Hyperactivity Disorder" (p. 2). Ms. Trejo testified that she had to continually monitor her daughters' activities due to their depression and suicidal tendencies.

From 2008 until 2013, Ms. Trejo took college courses on a part-time basis at Tarrant County College, Hill College, and Texas Wesleyan University. Her ultimate goal was to get a degree in bilingual education. However, "because of her family and financial situation, she no longer intend[ed] to return to college or obtain a degree" (p. 3).

At the time she filed for bankruptcy, Ms. Trejo's financial situation was precarious. As Judge Mark Mullin observed, Ms. Trejo had not had a full-time job in the last 15 years. She had worked part-time at a nail salon, but she gave up that work to care for her daughters. Due to her daughters' disabilities, she received Supplemental Security Income (SSI) checks from the Social Security Administration, totaling $1470 a month.

The U.S. Department of Education opposed Ms. Trejo's request for student-loan relief, arguing that she should sign up for a 25-year income-based repayment plan. According to DOE, Ms. Trejo's income was so low that she would not be obliged to pay anything under such a program (p. 4).

Judge Mullin applies the Brunner test and discharges Ms. Trejo's student-loan debt.

Judge Mullin applied the three-part Brunner test to determine whether it would work an undue hardship on Ms. Trejo if she were forced to repay her student loans. In Judge Mullin's view, Ms. Trejo met all three parts of that test.

First, the judge ruled that Ms. Trejo could not maintain a minimal standard of living for herself and her two dependent daughters if forced to pay her student loans.

Second, Ms. Trejo had shown that her financial situation was not likely to improve in the foreseeable future.

Third, Judge Mullin ruled that Ms. Trejo had handled her student debt in good faith. Although she had not made any payments on her student loans, she never had the financial wherewithal to do so.

Implications of the Trejo decision

Judge Mullin made the right decision when he discharged Ms. Trejo's student-loan debt. Clearly, she could not maintain a minimal standard of living for herself and her family and pay back her student loans. And, as Judge Mullins recognized, it was highly unlikely that Ms. Trejo's financial situation would improve significantly in the years to come.

The Trejo decision is a significant decision for at least three reasons. First, Judge Mullin flatly rejected DOE's tired argument that distressed student-loan debtors should be forced into long-term income-based repayment plans instead of getting their loans discharged in bankruptcy.  Over the years, DOE has snookered some bankruptcy judges with that silly argument, but those days may be over. It is absurd to deny an honest debtor bankruptcy relief in favor of a 25-year plan that requires the debtor to pay nothing.

Second, Judge Mark Mullin is one of a growing number of bankruptcy judges who are interpreting the Brunner test compassionately and with a dose of common sense. Judge Mullin took great care to write a judicial opinion that will be difficult to overturn on appeal. His decision contained 124 footnotes showing that his ruling was based on evidence in the trial record.

Finally, the Trejo decision prompts us to think about the enormous cost of higher education today, particularly when we consider how often the college experience does not lead to a good job.  Ms. Trejo borrowed about $65,000 to pay tuition at three colleges and got minimal benefit from the experience. Nevertheless, all three institutions that took Ms. Trejo's tuition money get to keep it.

We need to find a better way to provide low-income people like Jessica Trejo with the postsecondary education and training they need to become self-sufficient citizens. Clearly, the federal student loan program, as it is now operating, is not doing a good job.



References

Trejo v. U.S. Department of Education, Adversary No. 17-4052, 2020 WL 1884444 (N.D. Tex. Apr. 15, 2020).

Saturday, April 25, 2020

Laurina Bukovics v. ECMC: An Illinois woman took out $20,000 in student loans, paid back $29,000 and still owed $80,000

Laurina Kim Bukovics enrolled as a freshman at the University of Wisconsin in 1985 and graduated five years later. She took out about $20,000 in student loans to finance her studies. Over the years, she paid back $29,000--almost 140 percent of the principle. 

Nevertheless, 25 years after she graduated, Bukovics owed $80,000 on her student loans--four times what she borrowed.  Even though she had made 99 loan payments between 1999 and 2015—equivalent to more than eight years of twelve monthly payments-- her college-loan debt had quadrupled due to accumulating interest.

In 2015, Bukovics sought bankruptcy relief. Two years later, she filed an adversary proceeding to discharge her student loans. In 2018, while her adversary proceeding was pending, Bukovics lost her job.

Educational Credit Management Corporation, the federal government's ever-diligent debt collector, opposed a discharge of Bukovics's student-loan debt. ECMC argued that Bukovics could not meet the "undue hardship" test because she had not tried to maximize her income and not lived frugally.

In particular, ECMC accused Bukovics of spending too much money on food and not being diligent enough in looking for work.  Her job search was too narrow, ECMC claimed. 

In deciding Ms. Bukovics's case, Bankruptcy Judge Jack Schmetterer applied the three-part Brunner test to determine whether Bukovics could repay her student loans while still maintaining a minimal standard of living.  After conducting an extensive analysis of Bukovics's financial history, Judge Schmetterer ruled in her favor.

Clearly, Judge Schmetterer concluded, Bukovics could not maintain a minimal standard of living if she were forced to repay her student loans. After all, Bukovics was unemployed, temporarily living rent-free with a friend, receiving government nutritional assistance (food stamps), and getting her health care through Medicaid.

"Put simply, Judge Schmetterer wrote, given Bukovics's "frugal lifestyle and overall significant budget shortfalls, including the lack of money to provide for even basic needs, she would be unable to maintain a minimal standard of living if required to repay her student loan" (Bukovics v. ECMC, p. 189).

Judge Schmetterer rejected ECMC's arguments that Bukovics had spent too much money on food. On the contrary, he commented, spending $360 for sustenance over two to three months was not excessive.

In any event, Judge Schmetterer observed, ECMC's position "misses the point" (p.188). In the judge's opinion, ECMC was inappropriately looking for pennies that Bukovics might save when it was evident that her income was inadequate to meet her basic human needs.

Judge Schmetterer also rejected ECMC's claim that Bukovics had not looked hard enough for a job.  The judge pointed out that she had applied for over 200 positions over sixteen months and that several applications had led to job interviews (p. 187). Although the judge acknowledged that Bukovics voluntarily gave up her last job, she had testified that she had been pressured to quit and that her position had been eliminated after she terminated her employment.

Implications of the Bukovics decision

The Bukovics opinion is remarkable not so much because Laurina Bukovics won her case but for the fact that ECMC, the Department of Education's designated representative, would oppose her.

Ms. Bukovics borrowed $20,000 to obtain a bachelor's degree from a well-respected public university. She repaid $29,000 by making almost 100 monthly payments. Although financial circumstances forced her to skip monthly payments from time to time, the Department of Education acknowledged her hardship by granting her 10 deferments or forbearances.

Thirty years after graduating, Bukovics had reduced her debt by one dime. In fact, she owed four times what she borrowed. She was in her early fifties and out of a job.

What reasonable person would argue that Laurina Bukovics should not be freed of debt she can never repay?  And yet ECMC, representing the United States government, made that argument.

Today, the American economy is crippled by the coronavirus pandemic, and the nation's unemployment rate is 15 percent. Millions of people are living in circumstances similar to those of Ms. Bukovics.  Surely we need a more compassionate and efficient way of freeing destitute Americans from unmanageable debt than applying the outdated and callous Brunner test that examines how much an unemployed person spends on food.

References

Bukovics v. Educational Credit Management Corporation, 612 B.R. 174 (Bankr. N.D. 2020).

Judge Jack Schmetterer: ECMC missed the point


Wednesday, March 4, 2020

Clavell v. U.S. Department of Education: A New York bankruptcy judge takes refreshing approach to "undue hardship" in student-loan bankruptcy case

Clavell v. U.S. Department of Education: An Introduction

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.

Judge Wiles applies the three-part Brunner test to Mr. Clavell's financial situation.

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.

 Conclusion

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.

References

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

Tuesday, January 14, 2020

Little v. U.S. Department of Education: Should middle-aged people take out student loans to attend college?

Walter Lee Little and Linda Leticia Little, a married couple, are 58 years old. About thirteen years ago, they both took out student loans to take courses at various community colleges; but they never obtained degrees. They filed for bankruptcy in 2017 and applied to have their student-loan debt forgiven.

Like many student-loan debtors, they dived into the world of bankruptcy law without an attorney. The U.S. Department of Education was represented by a lawyer from the U.S. Attorney's Office.

The Littles filed an adversary action to obtain student-loan debt relief, but their case never went to trial. In June 2019, the Department of Education (DOE) filed a motion for summary judgment against the Littles, and Bankruptcy Judge Robert L. Jones granted DOE's motion in October.

In ruling against the Littles, Judge Jones applied the three-part Brunner test to determine whether the Littles met the Bankruptcy Code's "undue hardship" standard.  Regarding part one, Judge Jones said there was a factual dispute regarding whether the Littles could maintain a minimal standard of living if they were forced to repay their student loans.

Regarding Brunner's other two tests, Judge Jones flatly ruled against the Littles. The Judge ruled that the Littles could not show that "additional circumstances" would persist for "a significant portion of the repayment period of the loans . . ." (p. 859, quoting Brunner). Remarkably, Judge Jones said the Littles must show "a certainty of hopelessness" about their financial future, a standard that some other courts have rejected. 

The Littles argued that they were in their late 50s and nearing retirement. And they also pointed out that Mr. Little suffered from a variety of medical conditions and was disabled.

Judge Jones was entirely unsympathetic. "Mr. Little says that he suffers from a variety of medical conditions," the Judge observed, but those conditions "do not prevent Mr. Little from collecting disability payments or pension payments" (p. 860).

Regarding Mrs. Little's age and health prospects, Judge Jones said that "Mrs. Little was older when she went back to school and knew she would have to make payments in her later years" (p. 862).

In sum, Judge Jones ruled,  "The Littles chose to go to school later in life; the repayment of debts will thus last into their later years. Age... does not prevent the Littles from collecting pension payments; instead, their monthly income should increase upon turning 65" (p. 861).

As to Brunner's good faith test, Judge Jones ruled against the Littles as well. The Judge emphasized that the Jones had not made a single payment on their student loans

My sympathies are entirely with the Littles.  Judge Jones' decision partly rested on the fact that the Littles will receive pensions when they turn 65 based on their employment with ATT.  But those pensions are quite small. Mr. Little will receive about $850 a month and Mrs. Little anticipates getting $700 a month.  Judge Jones also noted that Mr. Little is entitled to receive a $900 disability check.

But these three sources of income together only amount to a gross income of $2450 per month--barely enough to live on.  It is completely unreasonable to expect the Littles to make student-loan payments during their retirement years to pay for educational experiences that apparently did not benefit them financially.

Would the Littles have a better case had they made some student-loan payments? Perhaps. But the Littlesstruggled financially for a variety of reasons that were beyond their control. They submitted documentation that they had been on food stamps for a time and had significant medical expenses (p. 857).

Judge Jones fortified his decision with citations to many legal opinions, but his opinion failed to note how much the Littles had borrowed to attend college or the interest rate on their loans. Nor was it clear from Judge Jones' opinion how long the Littles' loans were in forbearance or deferment, periods when they had no legal obligation to make student-loan payments.

In my opinion, the Department of Education considers Mr. and Mrs. Little to be collateral damage from an out-of-control student loan program that shovels federal money to colleges and universities without regard to the quality of their programs.

Judge Jones' Little decision shows that it is risky for middle-aged people to take out student loans to attend college. Moreover, although Judge Jones may not realize it, his decision in Little v. U.S. Department of Education undermined the ability of Mr. and Mrs. Little to live securely and in dignity when they reach their retirement years.


References

Little v. U.S. Department of Education, 607 B.R. 853 (Bankr. N.D. Tex. 2019).














Monday, January 13, 2020

Rosenberg v. ECMC: A NY bankruptcy judge cuts through the crap and discharges $221,000 in student-loan debt

Less than a week ago, Bankruptcy Judge Cecelia G. Morris cut through the crap and granted a student-loan discharge to Kevin Rosenberg, a Yeshiva University law graduate. Judge Morris's opinion was so compassionate and surprising that the lyrics of a traditional Christmas carol come to mind: "A thrill of hope, the weary world rejoices, for yonder breaks a new and glorious morn."

Judge Morris's decision may be appealed. If so, and her ruling is affirmed by the Second Circuit Court of Appeals, it will have enormous implications for millions of student loan debtors.

As even the nation's politicians now realize, the federal student-loan program has run amok like a crazed bull in Pamplona. Millions of distressed but honest student debtors need bankruptcy relief from crushing student debt, which now totals $1.6 trillion.

Unfortunately, many bankruptcy judges have denied student-loan debt relief even under the most heartwrenching circumstances. In most cases, these harsh judges have relied on the famous Brunner test to plunge the knife into the hearts of desperate student-loan borrowers.

The Brunner test, first articulated by the Second Circuit Court of Appeals in 1987, requires the debtor to show three things to discharge student-loan debt: 1) The Debtor cannot pay off the loan and maintain a minimal standard of living, 2) The debtor's precarious financial circumstances are likely to persist over the term of the repayment period, and 3) The debtor made good faith efforts to repay the student loans.

Educational Credit Management Corporation (ECMC), the Department of Education's designated assassin in the bankruptcy courts, almost always takes the position that the debtor cannot meet even one of the Brunner test's three prongs. The debtor is often forced to defend against ECMC's tactics without a lawyer; standing like Christ before Pontius Pilate--depicted by ECMC almost like a common criminal who deserves a public flogging.

Again and again, ECMC has argued to the courts that a debtor is unworthy of bankruptcy relief because the debtor lived above a minimal lifestyle. Maybe a debtor eats at fast-food restaurants a few times a month--what a spendthrift! Maybe the debtor has a pet-- an outrageous extravagance! Maybe the debtor rents an apartment with an extra bedroom or makes modest deposits into a retirement account--how recklessly irresponsible!

A summary of Judge Morris' opinion

And then--just a few days ago--a remarkable thing happened: Judge Morris cut through ECMC's crap and applied the Brunner test the way it was originally meant to be applied.  Applying a correct and well-reasoned interpretation of Brunner, she concluded that Kevin Rosenberg was entitled to relief from his student debt--about $221,000.

Here is a summary of Judge Morris's reasoning.

First, to determine whether Rosenberg can maintain a minimal standard of living if forced to repay his student loans, Judge Morris simply looked at the schedule of income and obligations that Rosenberg filed when he applied for bankruptcy. That schedule attested that Rosenberg's net monthly income was $2,456 and his expenses amounted to $4,005. Clearly, Rosenberg met the first prong of the Brunner test.

Second, the judge applied the Brunner test's second prong, which asks whether Rosenberg's financial circumstances were likely to persist over the "repayment period" of the student loans. Judge Morris pointed out that Rosenberg's repayment period had ended after his creditor accelerated his loan and demanded payment in full. Thus, it was evident that Rosenberg passed the second prong of the Brunner test.

Finally, Judge Morris ruled that Roseberg met Brunner's third prong; he had made good faith efforts to repay his student loans. According to the Judge's analysis, Rosenberg had only missed six payments over a 13-year period.  Indeed, for 10 of those 13 years, his loan was in forbearance or deferment and he wasn't required to make any payments.

Judge Morris ruled in favor of Mr. Rosenberg by interpreting the Brunner test as it was originally meant to be interpreted. Brunner, she noted, dealt with a debtor who filed for bankruptcy only a few months after graduating from college. Over the years, however, courts have incorrectly applied punitive standards to Brunner, making it almost impossible for worthy student-loan borrowers to obtain bankruptcy discharges.

"This Court will not participate in perpetuating these myths," Juge Morris wrote. She then applied Brunner to Mr. Rosenberg's situation as she believed the Second Circuit meant for the test to be applied.

What does the Rosenberg decision mean for 45 million student-loan debtors?

As I stated above, if Judge Morris's Rosenberg opinion is appealed and upheld by the Second Circuit, the implications are enormous.  A majority of federal circuits rely on the Brunner test to determine whether a debtor's student loans constitute an undue hardship and are dischargeable. Most federal courts have misinterpreted Brunner so harshly that many legal commentators maintain that student loans are never dischargeable in bankruptcy.

If the Second Circuit endorses Judge Morris's opinion, then bankruptcy courts across the country that have relied on Brunner for the past three decades will feel pressure to abandon their misinterpretation of Brunner in order to harmonize with Judge Morris' ruling.  Hundreds of thousands of student-loan debtors who do not qualify for student-loan relief under the bastardized Brunner standard will be eligible under the Rosenburg ruling.

Additionally, and perhaps most importantly, Judge Morris's Rosenburg decision undercuts a central argument made by both the U.S. Department of Education (DOE) and ECMC.  Both maintain that virtually all student debtors should be required to sign up for long-term, income-based repayment plans (IBRP) in lieu of getting bankruptcy relief.

Many courts have bought this specious (and I might say vicious) argument, which has led to absurd results. For example, in Butler v. ECMC, a bankruptcy judge refused to discharge Brenda Butler's student-loan debt in spite of the fact that the judge explicitly ruled that she had made good faith efforts to repay her student loans over a period of 20 years. Bankruptcy Judge Mary Gorman ruled that Ms. Butler should sign up for an IBRP, a plan that would end in 2037--42 years after Ms. Butler graduated from college!

Judge Morris pointed out that the Brunner test asks whether the debtor's financial circumstances are likely to improve over the "repayment period" of the loan, not whether the debtor can make token loan payments for 25 years. This simple change in the interpretation of the Brunner standard obliterates arguments made by DOE and ECMC that all distressed student debtors should sign up for repayment plans that last as long as a quarter-century.

So let's watch the Rosenberg litigation closely. If the Second Circuit puts its seal of approval of Judge Morris's ruling, the federal government will need to hire a lot more bankruptcy judges. And ECMC, which has made a nice living hounding student debtors in the bankruptcy courts, will have to look for another line of work.

References

Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).
Rosenberg v. Educational Credit Management Corporation, Adv. No. 18-09023 (Bank. S.D.N.Y. Jan. 7, 2019).









Tuesday, December 10, 2019

Murrell v. Educational Education Management Corp.: An Ohio Bankruptcy Court Misinterprets "Undue Hardship"

Calvin Murrell was thrown out of work in 2000 due to knee and back injuries. Murrell then attended Stautzenberger College, a private, for-profit community college with a total enrollment of around 300 students. He obtained a degree in web tech at Stautzenberger and then attended Spring Arbor College and Owens Community College, but he failed to complete programs at these schools.

Murrell took out almost $73,000 in student loans to finance his college studies, and in 2018,  he tried to discharge this debt in bankruptcy. He maintained that being forced to repay this debt would create an "undue hardship."

Judge John Gustafson, an Ohio bankruptcy judge, applied the three-part Brunner test to determine whether it would impose an undue hardship on Murrell if he were forced to repay his loans.

"Under the Brunner test," Judge Gustafson instructed, "the debtor must prove each of the following three elements: (1) that the debtor cannot maintain, based on current income and expenses, a 'minimal' standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans."

To obtain a discharge of his student loans, Murrell was required to prove all three elements of the Brunner test. Educational Credit Management Corporation opposed the discharge, arguing that Murrell failed to pass any of the Brunner test's three elements. ECMC produced a witness who testified that Murrell was eligible to participate in an income-based repayment plan (IBRP) that would require him to pay between $63 and $94 a month.

Judge Gustafson observed that Murrell's family income was about $44,000, consisting of $32,893 earned by Murrell's wife and $13,068 in Murrell's Social Security Disability payments. Judge Gustafson concluded that with a little belt-tightening, Murrell and his wife could make monthly student-loan payments of $63 to $94 a month and still maintain a minimal standard of living. Therefore the judge refused to discharge Murrell's student loans in bankruptcy.

In my view, Judge Gustafson misapplied the Brunner test when he ruled that Murrell's student loans were nondischargeable. The Brunner test does not ask whether a debtor can maintain a minimal standard of living if required to make token loan payments under an income-based repayment plan.  Rather it asks whether the debtor can pay off the student loans and maintain a minimal standard of living.

If Murrell signs up for an IBRP that requires him to pay $63 per month for 25 years, he will never pay off his student loans.  Quite the contrary; his student-loan debt will grow larger with each passing month.

Let us assume Murrell makes monthly payments of $63 under an IBRP. And let us further assume that his student-loan debt accrues interest at 5 percent. Interest at that rate on $73,000 amounts to $304 a month--almost five times the amount of his monthly payments.

Under an IBRP, Murrell's debt will negatively amortize as unpaid interest accumulates and becomes capitalized. Thus, the $73,000 dollars Murrell owes in 2019 will grow to a much larger number by the time 25years have passed.

The essence of Judge Gustafson's ruling is that no one is eligible to discharge student loans in bankruptcy because it is always possible to make token monthly payments under an IBRP. Indeed, debtors in IBRPs who are unemployed and have no income are not required to make any payments on their loans.

Currently, there are 8 million student-loan debtors enrolled in IBRPs.  Virtually none of these people are paying down the principal on their loans. When their repayment obligations come to an end--after 20 or 25 years--they will owe considerably more than they borrowed. This amassed debt will be forgiven, but the amount of the forgiven loans will be taxable to them as income.

This is insane. The only purpose of these income-based repayment plans is to hide the amount of student-loan debt that is not being paid off--hundreds of billion dollars.

References

Murrell v. Educational Management Corporation, 505 B.R. 464 (Bankr. N.D. Ohio 2019).




Wednesday, October 2, 2019

Shenk v. U.S. Department of Education: A bankruptcy judge denies student-loan discharge to 59-year-old army veteran

As John Lennon famously observed, "Life is what happens to you while you are busy making other plans." Certainly, Mr. Shenk, a military veteran, had other plans for his life other than filing for bankruptcy at the age of 59 in an effort to discharge $110,000 in student loans.

Timothy Shenk served 13 years in the U.S. Army (infantryman in the 82nd Airborne Division).  He then enlisted in the National Guard in order to obtain the 20 years of military service that would make him eligible for full retirement. That was a good plan.

Shenk also planned to become a teacher and he obtained a bachelor's degree from SUNY Cortland in 1999.  He then worked on a master's degree program in Adolescent Education, and he completed all the course work to obtain his degree.  That also was a good plan.

Unfortunately, Shenk had unpaid student loans, and SUNY Cortland refused to award him his diploma. In addition, the university had a five-year time frame to meet program requirements and that time period elapsed years ago.  Consequently, Mr. Shenk will never receive the degree he worked for, even though he met all program requirements.

Shenk married when he was a young man and he and his wife had four children. But the marriage ended in divorce, and he became liable for public assistance payments made to his ex-wife. By the time he filed for bankruptcy, he had paid off most of that obligation, which is commendable.

Bankruptcy Judge Margaret Cangilos-Ruiz expressed some sympathy for Mr. Shenk. She pointed out that his graduate studies were interrupted because the State of New York called him back for active military service after the terrorist attack on the World Trade Center in 2001. "The bitter irony is that when ordered by the Governor, [Shenk] assisted New York State at a time of dire need only later to have the State refuse to confer the degree that may have put him on a financial path to pay what he owed."

Nevertheless, Judge Cangilos-Ruiz denied Shenk's request for a student-loan discharge on the grounds that he did not meet the stringent standards of the three-part Brunner test.  He was unemployed at the time of the bankruptcy proceedings and he could not pay back his student loans and maintain a minimal standard of living. Thus he met Brunner's first requirement.  But the judge believed Shenk's financial circumstances would likely improve. He was employable, the judge pointed out, and he would soon be eligible for a small military pension and Social Security benefits.  The judge also said that Shenk failed Brunner's good-faith test because he had made no payments on his student loans over a number of years.

I think Judge Cangilos-Ruiz erred when she refused to discharge Mr. Shenk's student loans. First of all, universities should not be allowed to withhold a diploma simply because the would-be graduate has unpaid student loans. Such a policy amounts to putting student borrowers in debtor's prison--they cannot pay back their debts because their credentials are being withheld.

Moreover, Judge Cangilos-Ruiz denied Mr. Shenk a discharge partly due to the fact that he would eventually receive Social Security benefits and a modest military pension. In my view, no one who is nearing retirement age should be required to devote one penny of meager retirement income to paying back student loans.

In short, the equities of this case favored Mr. Shenk. Perhaps he made some mistakes in planning his finances but he served his country for 20 years in the U.S. military and he worked to obtain a graduate degree that his university refused to give him.

In any event, Mr. Shenk will probably never be able to repay $110,000 in student-loan debt. His only recourse now is to sign up for a long-term income-based repayment plan that could stretch out for as long as 25 years--when he will be 85 years old!

Isn't it ironic that presidential candidates are calling for a college education to be free to everyone while a man who served his country for 20 years is burdened by enormous student-loan debt? Thanks for your service, Mr. Shenk.

References

Shenk v. U.S. Department of Education, 603 B.R. 671 (Bankr. N.D.N.Y. 2019).







Tuesday, August 27, 2019

A disbarred lawyer is unable to discharge $250,000 in student loans in bankruptcy. Will he ever pay back those loans?

Paul Hurley obtained a law degree in 2004 and a master's degree in tax law in 2006. He took out student loans to fund his studies, and he was never in default on those loans.

About three years after getting his master's degree, Hurley took a job as a revenue agent for the Internal Revenue Service, which required him to audit taxpayers' federal tax returns. According to court documents, Hurley solicited a $20,000 bribe from a taxpayer in 2015, and he was convicted of two felonies: Receiving a bribe by a public official and receiving a gratuity by a public official. He was sentenced to 30 months in prison, and he lost his license to practice law in the state of Washington (601 B.R. at 532).

While still incarcerated, Hurley filed for bankruptcy and sought to discharge $256,000 in student loans. He was 45 years old at the time and had a three-year-old son. Hurley argued that it would be an undue hardship for him to pay back his student loans, given the fact that he could no longer practice law.

A bankruptcy court in the state of Washington denied Hurley's petition to discharge his student loans. In the court's opinion, Hurley failed the three-part Brunner test for determining whether repayment of his loans would constitute an undue hardship. 

In particular, the court ruled that Hurley failed the good faith prong of the Brunner test. In the court's view, Hurley's criminal conduct was "very significant' and outweighed his earlier, good-faith efforts to repay his student loans.

“As a lawyer,” the bankruptcy judge reasoned, “[Hurley] had to know that, if he committed the crime that he did, he would lose his ability to practice law. As such [Hurley] suffers from both failure to maximize his income and having willfully or negligently caused his financial condition” (601 B.R. at 533, appellate court quoting the bankruptcy court).

Hurley appealed the bankruptcy court’s decision to the Ninth Circuit Bankruptcy Appellate Panel, which affirmed the lower court’s opinion. The BAP court emphasized that it was not endorsing a bright-line rule that a criminal conviction always nullifies good faith. Nevertheless, the appellate court agreed with the bankruptcy judge that Hurley’s “willful criminal behavior tipped the balance against good faith”(601 B.R. at 536).

In addition, the BAP court agreed with the lower court that Hurley failed to maximize his income, which is a requirement for obtaining a student-loan discharge. Hurley maintained that he could not maximize his income because he lost his law license, but the BAP court pointed out that he lost his license “because of his willful conduct.”

Paul Hurley is not the most sympathetic person to seek student-loan relief in a bankruptcy court.  The BAP court and the bankruptcy court are clearly correct in concluding that Hurley’s financial predicament is the result of his own misbehavior.

But what did the BAP court accomplish when it ruled against Mr. Hurley? Will Hurley ever pay back the quarter of a million dollars he owes in student loans? No—I don’t think he will.

Hurley’s only hope now is to apply for an income-based repayment plan that will set his monthly loan payments based on his income. Such a plan will terminate in 20 or 25 years—when Hurley will be in his sixties. It seems virtually certain that his loan balance will keep growing with each passing month because interest will continue to accrue on his debt even if he makes his regular monthly loan payments.

Senator Bernie Sanders proposes student-loan forgiveness for everybodyeven Mr. Hurley. That may be going a bit far.

But people who are insolvent and unable to repay their student loans should be able to discharge those loans in bankruptcy like any other unsecured debt--even people who've made mistakes.

After all, what is the point of saddling Mr. Hurley with crushing student-loan debt he will never repay?




References

Hurley v. United States, 601 B.R. 529 (B.A.P. 9th Cir. 2019).



Friday, August 2, 2019

Lone Star Blues: Vera Thomas is 60 years old and suffers from diabetic neuropathy, but she lost her bid to discharge student loans in bankruptcy

Vera Thomas is more than 60 years old and suffers from diabetic neuropathy, "a degenerative condition that causes pain in her lower extremities." Unemployed and suffering from a chronic illness, she filed for bankruptcy in 2017 in the hope that she could discharge her student loans in bankruptcy. 

 At the time of her bankruptcy proceedings, Thomas was living in dire poverty. Her monthly income was less than $200 a month and she was surviving on "a combination of public assistance and private charity." 

How much did Ms. Thomas owe on her student loans? She borrowed $7,000 back in 2012 and she used her loan money to attend community college for two semesters. Thomas didn't return for a third semester, and she only paid loan payments totally less than $85. 

Judge Harlin Hale, aTexas bankruptcy judge, applied the three-part Brunner test to determine whether Thomas would suffer an "undue hardship" if forced to pay off her student loans. Part one required her to show that she could not pay back her student loans and maintain a minimal standard of living. Thomas clearly met this part of the test.

Brunner's second part required Thomas to establish that circumstances beyond her control made it unlikely that she would ever be able to repay her student loans. The U.S. Department of Education argued that Thomas could not meet this part of the Brunner test and Judge Hale agreed. In spite of her debilitating illness,  he concluded, Thomas could not show that she was "completely incapable of employment now or in the future." Surely there was some sedentary work she was capable of doing, Judge Hale reasoned.

In short, Judge Hale denied Thomas's request for bankruptcy relief from her student loans. He expressed sympathy for Ms. Thomas's situation, but he said that during his entire time on the bench, he had never granted student-loan bankruptcy relief over the objection of the lender (the U.S. Department of Education or its contracted debt collectors).

Thomas appealed to a U.S. District Court, which affirmed Judge Hale's decision; and then she appealed to the Fifth Circuit Court of Appeals. Two public interest groups came to her aid by filing an amicus brief. The National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys argued that the Brunner test was no longer an appropriate standard for determining whether a student-loan debtor is entitled to bankruptcy relief and should be overruled. 

But the Fifth Circuit refused to abandon the Brunner test or even to soften the way it is interpreted.  Unless the Supreme Court or an en banc panel of the Fifth Circuit overrules Brunner, the Fifth Circuit panel stated, it was bound by that decision.

The Fifth Circuit decision  implicitly acknowledged that the federal student-loan program poses an enormous public-policy problem, but in the court’s view, it was not the judiciary’s job to fix it: "[T]he fact that student loans are now mountainous in quantity poses systematic issues far beyond the capacity or authority of courts, which can only interpret the written law. . . Ultimate policy issues raised by Ms. Thomas and the amicus are for Congress, not the courts."


So what does the future hold for Vera Thomas? Her student-loan debt is undoubtedly far larger today than it was when she initially borrowed $7,000 to enroll at a community college back in 2012. Over the years, interest has accrued and perhaps penalties and fees. In the aftermath of the Fifth Circuit's decision, it seems likely that Vera Thomas’s only viable option is to sign up for an income-driven repayment plan, which will terminate when she is 85 years old. 



References

Thomas v. U.S. Department of Education, No 18-11091 (5th Cir. July 30, 2019).

Monday, July 1, 2019

Hill v. ECMC: An Army veteran with PTSD sheds her student loans in bankruptcy

Hill v. ECMC: A veteran seeks to discharge her student loans in bankruptcy

Risa Rozella Hill enrolled at Wichita State University after getting out of the Army, and she obtained a bachelor's degree in social work in 2002. She went on to pursue a master's degree from Newman College but did not graduate. In 2008, she received an MBA from DeVry University.

Hill financed her studies with 23 student loans totally $127,000. She never paid anything on these loans, but she was never in default because she obtained various deferments or forbearances that entitled her to skip her loan payments.

In 2013, Hill began to experience symptoms of psychosis, including delusions, hallucinations, and voices that "instructed her to behave in certain ways." In 2014, she was involuntarily committed to psychiatric care in a Georgia hospital. She was diagnosed with bipolar disorder and post-traumatic stress disorder (PTSD).

Hill was released from the hospital, but she was readmitted to another hospital a few months later after showing signs of psychosis. She was released again in November 2014.

Prior to filing for bankruptcy, Hill experienced periods of homelessness. The Social Security Administration deemed her disabled and she began receiving disability-benefit checks--her sole source of income. She also began living in publicly subsidized housing.

In 2017, Hill filed for bankruptcy and sought to have her student loans discharged. Hill was represented by the Atlanta Legal Aid Society. Educational Credit Management entered the litigation as the sole defendant.

Judge Sage Sigler discharges Hill's student loans over ECMC's objections

In evaluating Hill's claim, Judge Sage Sigler applied the three-pronged Brunner test to determine whether repaying the loans would constitute an "undue hardship" under 11 U.S.C. § 523 of the Bankruptcy Code. In Judge Sigler's opinion, Hill's disability income was hardly adequate to meet her basic needs.  Hill could not maintain a minimal lifestyle if she were forced to pay back her student loans, Judge Sigler concluded; and thus, Hill satisfied the first prong of the Brunner test.

Moreover, Judge Sigler continued, Hill's financial circumstances were unlikely to improve during the loan repayment period. "[T]he weight of the evidence demonstrates that [Hill's] condition will persist indefinitely," Judge Sigler observed; and any recovery from Hill's bipolar disorder was "purely speculative." Indeed, Judge Sigler wrote, "The prospect of [Hill] obtaining and maintaining employment commensurate with her prior jobs is unfortunately hopeless." In short, Hill met part two of the Brunner test.

Part Three of the Brunner test required Hill to show that she had handled her student loans in good faith.  Again, Judge Sigler ruled in Hill's favor. Hill met the good faith standard in spite of the fact she had not made a single loan payment.

Judge Sigler pointed out that Hill took the steps necessary to obtain deferments or forbearances, which the judge evidently viewed as a sign of good faith. Moreover, the judge noted, "Good faith effort only requires the debtor to have made payments when she was in a position to make such payments. [Hill] was never in such a position."

Implications

In some ways, the Hill decision is unremarkable. Hill's mental illness (psychosis and PTSD) clearly qualified her for a student-loan discharge. What is remarkable is the fact that ECMC opposed it. ECMC dragged out its shopworn tactic of demanding that Hill sign up for REPAYE, a long-term income-based repayment plan--a plan that would have required her to make monthly payments of zero dollars due to her low income.

But Judge Sigler did not buy that line. ECMC's calculation of Hill's loan payments under REPAYE demonstrated that Hill had no discretionary income to dedicate to student-loan repayment. "The very reason [Hill's] payment amount would be zero-dollars a month under REPAYE is because she cannot afford to make payments under her student loans and maintain a minimal standard of living."

The Hill case is probably most significant as another case in which a bankruptcy judge refused to adopt ECMC's tiresome argument that all student-loan debtors should be placed in income-based repayment plans as an alternative to bankruptcy relief.  Judge Sigler identified the fundamental flaw in ECMC's argument, which is this: Debtors so destitute that they are required to make zero-dollar payments on their student loans clearly meet the first criterion for student-loan relief under Brunner. They cannot maintain a minimal lifestyle and pay off their student loans.


Friday, October 26, 2018

Augustin v. U.S. Department of Education: Adventures in Fantasy Land

In  April 2016, Pierre Augustin filed an adversary complaint in a Maryland bankruptcy court, seeking to discharge $210,000 in student loan debt. He told the court he had been burdened by this debt for 24 years, and that his financial circumstances did not permit him to pay it back. Augustin's wife also had student-loan debt: $120,000. Together the couple had accumulated a third of a million dollars in student debt.

Augustin had three postsecondary degrees: a bachelor's degree in political science from Salem State University in Massachusetts, a master's degree in public administration from Suffolk University in Boston, and an MBA from University of Massachusetts Lowell. Seventeen years after receiving his MBA degree, he was working  as a security guard.

Augustin claimed he was unable to find a job in the field of his degrees, but together he and his wife earned a net income of more than $6,000 a month. The Department of Education (DOE) offered Augustin a 25-year income-based repayment plan that would allow him to pay $331 a month toward his student loans or a 15-year plan with payments of $1,138 a month.

Augustin did not accept DOE's offers. Under the 25-year plan, he argued, he would face a lifetime of indebtedness. Moreover, when the payment term ended, he would face massive tax liability for the amount of forgiven debt. The 15-year plan was also unacceptable, he maintained, because it would not allow him to save money for his retirement.

Bankruptcy Judge Thomas Catliota was not sympathetic. The judge applied the three-pronged Brunner test to determine whether Augustin's student debt constituted an undue hardship.  Under Judge Catliota's analysis, Augustin failed all three prongs.

First, Judge Catliota noted, Augustin could make monthly loan payments of $331 under the 25-year repayment plan while maintaining a minimal standard of living. Second, Augustin could not show additional circumstances that would make it impossible to make monthly payments in that amount.

Finally, Judge Catliota ruled, Augustin had not demonstrated good faith. Augustin had not made a single payment on his student loans for more than a quarter of a century. "By his own  admission,"the judge pointed out, "Mr. Agustin deferred his loans for approximately 26 years."

Moreover, Mr. Augustin was not willing to accept DOE's offer of a  manageable repayment plan. In Judge Catliota's view, "This shows lack of good faith on [Augustin's] part."

Not surprisingly then, Judge Catliota refused to discharge Mr. Augustin's student debt. Applying the three-part Brunner test, Augustine was not entitled to relief.

Perhaps Judge Catliota reached a just outcome in the Augustin case. But let's look at the case in a larger context. Why does the Department of Education loan people money for multiple college degrees and then permit borrowers to make no payments on those loans for 25 years?

Why does the government push people into 25-year repayment plans that allow debtors to make monthly payments so low that they don't cover accruing interest? Even if Mr. Augustin agrees to make income-based payments of $331 a month for 25 years, he will never pay back the $210,000 he owes.

Finally, why apply the Brunner test to people like Mr. Augustin? Why not simply ask whether Mr. Augustin and his wife will ever pay back $330,000 in student-loan debt? The answer is clearly no.

In short, Augustin v. Department of Education is another adventure in Fantasy Land, which is what the federal student-loan program has become. Our government has rigged an insane student-loan program that is trapping millions of people to a lifetime of indebtedness from which there is no relief.

References

Augustin v. U.S. Department of Education, 588 B.R. 141 (Bankr. D. Md. 2018).