Tuesday, January 14, 2020
Little v. U.S. Department of Education: Should middle-aged people take out student loans to attend college?
Monday, January 13, 2020
Rosenberg v. ECMC: A NY bankruptcy judge cuts through the crap and discharges $221,000 in student-loan debt
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.
Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).
Tuesday, December 10, 2019
Murrell v. Educational Education Management Corp.: An Ohio Bankruptcy Court Misinterprets "Undue Hardship"
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.
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
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.
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?
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?
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
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."
Thomas v. U.S. Department of Education, No 18-11091 (5th Cir. July 30, 2019).
Monday, July 1, 2019
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."
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 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.
Augustin v. U.S. Department of Education, 588 B.R. 141 (Bankr. D. Md. 2018).
Tuesday, July 10, 2018
Alexandra Acosta-Coniff v. ECMC: A single mother wins bankruptcy relief from student loans but sees victory snatched away on appeal
At her trial, Judge William Sawyer applied the three-part Brunner test to determine whether Acosta-Conniff met the "undue hardship" standard for having her student loans discharged in bankruptcy.
First, Judge Sawyer ruled, Conniff could not pay back her student loans and maintain a minimal standard of living for herself and her two children. Thus she met the first part of the Brunner test.
Second, Conniff's economic circumstances were not likely to change in the foreseeable future. Conniff was a rural school teacher, Judge Sawyer pointed out, who could not expect a significant rise in income. Although she had obtained a doctorate in education, that doctorate had not paid off financially.
Third, Judge Sawyer ruled, Conniff had handled her student loans in good faith. She had made monthly payments over several years and she had obtained deferments from making payments--deferments she was eligible to receive. In Judge Sawyer's view, Conniff met the good-faith requirement of the Brunner test.
In short, Judge Sawyer determined, Conniff qualified for bankruptcy relief under the Bankruptcy Code's "undue hardship" standard as interpreted by Brunner. Accordingly, the judge discharged all of Conniff's student-loan debt.
ECMC appealed, and Judge Keith Watkins reversed. Fortunately, retired bankruptcy judge Eugene Wedoff volunteered to represent Conniff without charge, and Wedoff and his associates took her case to the Eleventh Circuit Court of Appeals.
In 2017, four years after Conniff filed her adversary proceeding, the Eleventh Circuit reversed the trial court, directing Judge Watkins to review Judge Sawyer's ruling under the "clear error" standard. In other words, unless Judge Sawyer had committed clear error in deciding for Conniff, Judge Watkins was bound to uphold Sawyer's decision. The Eleventh Circuit remanded the case back to Judge Watkins to straighten things out.
In January 2018, Judge Watkins issued his second opinion in Conniff's case, and he concluded that Judge Sawyer had indeed committed clear error when he ruled in Conniff's favor. Judge Watkins' opinion is a bit convoluted, but basically he said Judge Sawyer made a mistake in failing to determine whether Conniff was eligible for an income-contingent repayment plan (ICRP).
In Judge Watkins' opinion, if Conniff can make even small loan payments under an ICRP and still maintain a minimal standard of living, she is not eligible for bankruptcy relief.
So what does this mean?
It means Alexandra Acosta-Conniff must return to bankruptcy court a second time--more than three years after her first trial. Apparently, Judge Sawyer will not schedule a second trial; instead, he has asked Conniff and ECMC to submit proposed findings of facts. At some point, Judge Sawyer will issue his second opinion on Conniff's case.
Conniff owed $112,000 in 2015, when she was 44 years old. Her debt has grown over the last three years due to accrued interest, and Conniff is older. She is now 47 years old.
What does the future hold for Alexandra Acosta-Conniff? More litigation.
If Conniff wins her second trial, ECMC, ruthless and well financed, will undoubtedly appeal again; and the case will ultimately go back to the Eleventh Circuit a second time. Conniff now has an able lawyer, so if she loses before Judge Sawyer, she will likely appeal. So--win or lose--Conniff is in for at least two more years of stressful litigation. When this is all over, Conniff will likely be 50 years old.
Here's my take on Conniff's sad odyssey through the federal courts. First, Judge Watkins' most recent decision is deeply flawed. In Watkins' view, a student-loan debtor who can make even small loan payments under an ICRP while maintaining a minimal standard of living cannot discharge her student loans in bankruptcy: period.
But if that were true, then no student-loan debtor is eligible for bankruptcy relief. In several cases, ECMC or the U.S. Department of Education has argued that a student-loan debtor living at or below the poverty line should be denied bankruptcy relief and required to enter into an ICRP even though the debtor would be required to pay zero. In fact, ECMC and DOE have been arguing for years that basically every destitute student-loan debtor should be put in an ICRP and denied bankruptcy relief.
Do want some examples? Roth v. ECMC (9th Cir. BAP 2013), Myhre v. U.S. Department of Education (Bankr. W.D. Wis. 2013), Abney v. U.S. Department of Education (Bankr. W.D. Mo. 2015), Smith v. U.S. Department of Education (Bankr. D. Mass. 2018).
The Roth case illustrates the insanity of this point of view. In that case, ECMC fought bankruptcy relief for Janet Roth, an elderly retiree with chronic health problems who was living on less than $800 a month in Social Security benefits. Put her in an ICRP, ECMC insisted, even though she would be required to pay nothing due to her impoverished circumstances.
The Ninth Circuit's Bankruptcy Appellate Panel pointed out the absurdity of ECMC's position. It would be pointless to put Roth in an ICRP, the court ruled. "[T]he law does not require a party to engage in futile acts."
Forcing Alexandra Acosta-Conniff into an ICRP, which Judge Watkins obviously desires, is a futile act. She will never pay off her student loans, even if she makes small monthly income-based payments for the next 25 years.
Acosta-Conniff is a big, big case. If Judge Watkins' hardhearted view prevails, then bankruptcy relief for student-loan debtors is foreclosed in the Eleventh Circuit. If the compassionate and common-sense spirit of Judge Sawyer's original 2013 opinion is ultimately upheld, then distressed student-loan debtors like Alexandra Costa-Conniff will get the fresh start that the bankruptcy courts were intended to provide.
The Eleventh Circuit Court of Appeals will ultimately have to look at Alexandra Acosta-Conniff's case a second time. But her next trip to the Eleventh Circuit is likely at least two years away.
|The Honorable Judge Keith Watkins|
Acosta-Conniff v. ECMC, 536 B.R. 326 (Bankr. M.D. Ala. 2015).
ECMC v. Acosta-Conniff, 550 B.R. 557 (M.D. Ala. 2016).
ECMC v. Acosta-Conniff, 686 Fed. Appx. 647 (11th Cir. 2017).
ECMC v. Acosta-Conniff, 583 B.R. 275 (M.D. Ala. 2018).
Monday, June 25, 2018
Should courts look for bad faith when distressed student-loan debtors ask for bankruptcy relief? Further reflections on Smith v. Department of Education
Most courts have adopted the Brunner test for determining when a student loan is an undue hardship that can be discharged in bankruptcy. That test has three parts:
1) Can the debtor pay back the loan while maintaining a minimal standard of living?
2) Will the debtor's financial circumstances change during the lifetime of the loan?
3) Did the debtor handle his or her loans in good faith?
In Smith v. Department of Education, decided a few months ago, Judge Frank Bailey, a Massachusetts bankruptcy judge, explicitly criticized the Brunner test's "good faith" component:
[A]ny test that allows for the court to determine a student debtor's good or bad faith while living at a subsistence level, virtually strait-jacketed by circumstances, displaces the focus from where the statute would have it: the hardship. It also imposes on courts the virtually impossible task of evaluating good or bath faith in debtors whose range of options is exceedingly limited and includes no realistic hope of repaying their loans to any appreciable extent. . .(p. 566)Judge Bailey argued for a simpler and fairer standard for determining when a student loan can be discharged in bankruptcy: "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough" (p. 565) (italics supplied).
Eliminating the good faith component of the Brunner test would have a huge impact on student-loan bankruptcy jurisprudence because the Department of Education and its thug debt collectors almost always argue that a debtor filed for bankruptcy in bad faith. And this is ironic because it is the Department of Education, not student-loan debtors, that repeatedly demonstrates bad faith in the bankruptcy courts.
Let's take the Smith case as an example:
1) First of all, the U.S. Department of Education has publicly proclaimed it will not oppose bankruptcy relief for student debtors who are disabled. Mr. Smith is disabled; and Smith and his mother subsist entirely on Smith's monthly disability check, food stamps, and his mother's tiny Social Security income. Thus, DOE was opposing Mr. Smith's plea for bankruptcy relief in direct contradiction to DOE's own policy. In my opinion, that shows DOE's bad faith.
2) In a 2015 letter, a Department of Education official said DOE would not oppose bankruptcy relief when it made no economic sense to do so. Smith's adversary proceeding stretched out over five days, taking up Judge Bailey's time; and both Smith and DOE had lawyers. (In fact, DOE had two lawyers.) Smith only borrowed $29,000; and the litigation expenses almost certainly exceeded that amount. In my view, DOE's decision to chase Smith into bankruptcy court is additional evidence of bad faith.
3) Finally, DOE insisted Smith should be put in a long-term income-based repayment plan, even though it admitted Smith's income was so low that his monthly loan payments would be zero. So what was the point of fighting Smith in bankruptcy court? Again, this is more evidence of DOE's bad faith.
In fact, the Department of Education and the student loan guaranty agencies (ECMC in particular) almost always argue that a distressed student-loan debtor filed for bankruptcy in bad faith. And this is true even when the debtor is hovering on the brink of homelessness.
After all, in the Myhre case, DOE opposed student-loan debt relief for a quadriplegic whose expenses exceeded his income. In the Abney case, DOE fought Kevin Abney, who was so poor he did not own a car and traveled to work on a bicycle. And in the Stevenson case, ECMC objected when Janice Stevenson, a woman with a record of homelessness and who lived in subsidized housing, tried to discharge almost $100,00 in student loans.
So Judge Bailey is right. The federal courts should stop asking whether down-and-out student-loan debtors handled their student loans in good faith. The only important questions are these: Can the debtor pay back his or her student loans? Will the debtor ever be able to pay back those loans?
And if the courts continue to insist on looking for bad faith, they should look for it by the Department of Education, ECMC, and the entire gang of government-subsidized debt collectors.
Jillian Berman. Why Obama is forgiving the student loans of almost 400,000 people. Marketwatch.com, April 13, 2016.
Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).
Stevenson v. ECMC, Case No. 08-14084-JNF, Adv. P. No. 08-1245 (Bankr. D. Mass. August 2, 2011).
Some physical or mental impairments can qualify you for a total r permanent disability discharge on your federal student loans and/or TEACH grant service obligation. U.S. Department of Education web site (undated).
Tuesday, December 12, 2017
Coplin v. U.S. Dep't of Education: Bankruptcy court orders single mother of 4 disabled children to repay $222,000 in student loans
Coplin also has a 15-year-old child who suffers from autism. He is six feet tall, weighs 340 pounds and engages in "anxiety-induced acting-out behavior." Coplin has called the police on several occasions to deal with her son's aggressiveness.
Coplin herself is bipolar and has made several suicide attempts.
Although Coplin graduated law school in 2009, she was unable to pass the state bar exam until 2012. She practiced law for a time and even established her own firm. She found, however, that family issues prevented her from working as an attorney. At time of trial, Coplin was a night-shift waitress at the Muckleshoot Casino
Coplin filed an adversary proceeding in bankruptcy court to discharge almost half a million dollars in student-loan debt, some of it accruing interest at the rate of 10 percent. Navient, one of her creditors, agreed to discharge part of the debt, but three creditors opposed a discharge: ECMC, the U.S. Department of Education and University of the Pacific.
In a decision entered a few days ago, Judge Mary Jo Heston granted Coplin a partial discharge. Utilizing the three-pronged Brunner test, Judge Heston concluded Coplin only met two prongs.
First, Coplin met the first prong, which required her to show she could not pay back her student loans and maintain a minimal standard of living. She also met a second prong, requiring her to show she had handled her student loans in good faith.
Nevertheless, Judge Heston did not grant Coplin a full discharge. Coplin had about $1850 in discretionary monthly income, the judge pointed out. She could put that amount toward paying off her student loans. Judge Heston ruled that Coplin could pay back $222,000 over a ten-year period; and thus she only granted Coplin a partial discharge.
It should be pointed out that the only reason Coplin had any discretionary income was that she was living in her fiancee's home rent free. In addition, I don't think the bankruptcy judge accurately estimated Coplin's ongoing medical expenses. Coplin said she visited doctors 6 or 7 times a week due to her children's medical issues.
These are my reflections on the Coplin decision:
First, I was struck by Coplin's strong work ethic. As Judge Heston noted, Coplin had worked continuously at a variety of jobs since graduating from law school. She practiced law, sold real estate, worked as a delivery driver, and finally wound up working the night shift as a casino waitress. No one can say she didn't do her best to feed her family.
Second, I was shocked by the ruthlessness of Coplin's creditors. The creditors--including the U.S. Department of Education--argued Coplin should be denied a discharge because she had not lived frugally. They pointed to the fact that she occasionally dined at fast food restaurants, had cable television, and had taken a modest vacation.
Is Betsy DeVos' Department of Education saying that a casino waitress with four disabled children is living extravagantly because she occasionally eats at McDonald's? Yes, it is.
Finally, I was astonished by the arrogance of University of the Pacific, where Coplin went to law school. One would think the university would be embarrassed by the fact that one of its law graduates racked up half a million dollars in student-loan debt (including accrued interest), took three years to pass the bar exam and was working as a waitress 8 years after obtaining her law degree. But no--UP wants its money--at 10 percent interest.
In sum, I found the Coplin decision disheartening. If a waitress with four disabled children can't obtain a complete discharge of her student loans in a bankruptcy court then it is difficult to see how any student-loan debtor is entitled to bankruptcy relief. God help us.
|Muckleshoot Casino, where attorney Heather Coplin works as a waitress|
Coplin v. U.S. Department of Education, Case No. 13-46108, Adversary No. 16-04122, 2017 WL 6061580 (Bankr. W.D. Wash. December 6, 2017).
Saturday, July 15, 2017
A single mother of three children gets a bankruptcy discharge of her student loans: Price v. Betsy DeVos and U.S. Department of Education
Price v. DeVos and the U.S. Department of Education: A single mom files for bankruptcy
At the time of trial, Ms. Price was 29 years old and had three children ages 3, 5 and 11. Although she was still married, she was separated from her husband and anticipated a divorce.
Price obtained a Bachelor of Science degree in Radiology Science from Thomas Jefferson University in 2011, financing her studies with federal and private loans. At the time of trial, she worked part-time as a vascular sonographer but was unable to find full-time work in her field. She testified she could obtain a second part-time job working outside her field but the additional child care costs did not justify that option.
Price received informal child support from her estranged husband, but her reasonable expenses still exceeded her income. She testified that she lived with her mother in return for paying her mother's mortgage payment--about $1400 a month.
At the time Price filed her adversary complaint in the bankruptcy court, she owed nearly $26,000 in federal loans and $30,000 to Chase Bank. Price settled with Chase prior to trial. Thus the only issue before Judge Frank was whether Price was entitled to have her federal loans discharged.
Judge Frank applied the three-part Brunner test to rule for Ms. Price
Judge Frank applied the three-part Brunner test to decide Price's case. The Department of Education conceded that Price passed the first prong of the Brunner test; she could not pay back her federal loans and maintain a minimal standard of living.
The Department also conceded that Price passed Brunner's third prong. It acknowledged that she had handled her student loans in good faith.
But DOE argued that Price could not pass Brunner's second prong. According to DOE, Price could not show additional circumstances making it likely that her financial situation would not improve "for a significant portion of the repayment period of the student loans." Basically, DOE maintained that Price was young and healthy and was qualified for a good job in the medical field. Eventually, DOE pointed out, Price's children would grow up and leave the home, which would enable Price to get a better job and repay her student loans.
And here is where Judge Frank's opinion gets interesting. Price argued that her future financial prospects should be considered for no longer than the remaining period of her 10-year loan repayment obligation, which ended in 2024. DOE argued that Judge Frank should consider Price's financial prospects for a much longer time--the 20- or 25-year period of an income-based repayment plan.
Fortunately for Price, Judge Frank did not buy DOE's argument. The judge ruled that Price had rejected a long-term income-based repayment plan in good faith; and thus he would consider her financial prospects based on the terms of her ten-year repayment obligation and not the 20 or 25 years DOE requested.
Judge Frank said he was obligated to consider Price's future financial prospects based on "specific articulable facts, not unfounded optimism." If he were required to consider Price's financial situation over a 20- or 25-year term, Judge Frank reasoned, his determination "[would] be nothing more than mere guesswork, without any reasonable degree of certitude."
Moreover, Judge Frank pointed out, DOE's own expert testified that DOE's 20-year REPAYE program was ill-suited for Price and that he would not recommend it for her. Judge Price also noted that a REPAYE plan would require Price to consolidate her debt, which would cause accrued interest to be capitalized into a larger loan balance--meaning she would be "paying interest on interest."
If Price's meager income did not improve significantly in later years, Judge Frank explained, her loan would eventually "reach a kind of 'escape velocity,'" meaning that her monthly payments would not be enough to cover accruing interest and her loan balance would grow "for the next several decades."
Based on this analysis, Judge Frank then considered what Price's financial prospects would likely be over the next five years--about 70 percent of the remaining repayment period. The judge concluded Price would probably be unable to pay back her loans over that period.
In short, after applying the second prong of the Brunner test to Price's financial outlook, the judge discharged all of Price's federal loans.
Without question, the heart of Judge Price's ruling was based on his conclusion that Price had rejected a long-term payment period in good faith. And of course, his decision was made a lot easier due to the fact that DOE's own expert admitted that a long-term repayment plan was not appropriate for her.
What does the Price decision mean for other overburdened student-loan debtors?
Judge Frank's Price decision is significant for at least three reasons:
First, this is the most recent in a string of bankruptcy court decisions that have discharged student-loan debt owed by single mothers with dependent children. Price follows in the wake of Lamento, Acosta-Conniff (on appeal), Fern, and McDowell--all decisions involving single mothers with children who won discharges or partial discharges of their student loans.
Second, this is the latest in a series of very well-reasoned bankruptcy court decisions in which bankruptcy judges have worked hard to grant relief to overburdened debtors within the harsh constraints of the Brunner test. Judge Frank's decision was 25 pages long; Judge Berger's decision in the Johnson case out of Kansas was extensively researched. The Abney decision, the Fern decision, and several more have displayed remarkable intellectual agility and commendable commitment to the bankruptcy courts' core purpose, which is to grant overburdened debtors a fresh start in life.
Third, Judge Frank ruled that when a court applies the second prong of the Brunner test to determine whether a debtor's financial prospects will improve in the future, the appropriate time period for consideration is the original term of the loan (generally 10 years) rather than the extended term of a hypothetical 20-year or 25-year income-based repayment plan.
Admittedly, Judge Frank's conclusion on this last point is a little fuzzy. Price had refused to sign up for a long-term, income-based repayment plan, and Judge Frank ruled that Price's decision to reject such a plan had been made in good faith. Judge Frank might have ruled differently if Price had signed up for a 20-year REPAYE plan before filing for bankruptcy.
Indeed, the judge wrote that the "outcome may well be different in other cases in which the extended loan repayment programs present a more attractive option, or for other appropriate reasons." And the judge also noted that DOE did not dispute the fact that Price's decision to reject a long-term repayment plan had been made in good faith.
In the final analysis, all we can say for sure about the Price decision is this: A healthy 29-year old mother of three children with good future job prospects won a bankruptcy discharge of her student loans based primarily on the fact that her judge did not think Price would be in a position to repay her loans over the next five years.
Personally, I would have liked the Price decision better if Judge Frank had said that a student-loan debtor's financial prospects should always be limited to the term of the original student loan--generally no more than 10 years. That's not what the judge ruled. Nevertheless, it is a good decision for student-loan debtors.
Acosta-Conniff v. ECMC [Educational Credit Management Corporation], 536 B.R. 326 (Bankr. M.D. Ala. 2015), reversed, 550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).
In re Lamento, 520 B.R. 667 (Bkrtcy. N.D. Ohio 2014).
Price v. U.S. Department of Education, ky. No. 15-17645 ELF, Adv. No. 16-0011, 2017 Bankr. LEXIS 1748 (Bankr. E.D. Pa. 2017).
McDowell v. Educational Credit Management Corporation, 549 B.R. 744, 774 (Bankr. D. Idaho 2016).
Thursday, May 11, 2017
ECMC n v. Acosta-Conniff: Just because you made some bad decisions doesn't disqualify you from discharging your student loans in bankruptcy
Interest accrued on the loans while they were in deferment, and by the time Conniff filed for bankruptcy, her loan balance had grown to $112,000. In 2013, Conniff filed an adversary action against Educational Credit Management Corporation, seeking to discharge her student loans in bankruptcy.
At the trial on her adversary complaint, Conniff (who argued her case without a lawyer), presented evidence that her expenses slightly exceeded her income and that she was only able to make ends meet by getting financial aid from her parents.
Although [Conniff] is not satisfied with the pay the advanced degrees ultimately have yielded, Conniff chose to earn four degrees, funded primarily by student loans, in her preferred career path of education with a general understanding of the benefits she wold obtain from the degrees versus the costs. She admits specifically that she decided to obtain another student loan to earn her pinnacle Ph.D. in special education and agreed to repay it, knowing how the cost of the Ph.D. compared with the increase in pay it would provide. Conniff finds herself in circumstance largely of her own informed decision-making, which although not dispositive is a consideration.
[T]he second prong [of Brunner] is a forward-looking test that focuses on whether a debtor has shown her inability to repay the loan during a significant portion of the repayment period. It does not look backward to assess blame for the student debtor's financial circumstances. Thus, even if the court concludes that a debtor has acted recklessly or foolishly in accumulating her student debt, that does not play into an analysis under the second prong. Nor should it be considered on remand in analysis of that prong. [emphasis supplied]The Eleventh Circuit decision (which was not published) is not an outright win for Conniff. She must return to the district court to enable Judge Watkins to reconsider her situation under the Brunner test in accordance with the Eleventh Circuit's directive. But it is a good decision overall, not only for Conniff, but for many other student-loan debtors in bankruptcy.
Let's face it. Millions of distressed student debtors are indebted up to their eyeballs by student loans at least partly because they made some questionable decisions. Perhaps they obtained their degrees from expensive for-profit colleges instead of enrolling in a more reasonably priced public institution. Maybe they chose professions that will not lead to high-paying jobs. Perhaps they changed majors midway through their studies and incurred additional costs.
Acosta-Conniff v. ECMC [Educational Credit Management Corporation], 536 B.R. 326 (Bankr. M.D. Ala. 2015), reversed, 550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).
ECMC [Educational Credit Management Corporation v. Acosta Conniff], No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017) (unpublished opinion).
ECMC [Educational Credit Management Corporation] v. Acosta-Conniff, 550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).
Saturday, February 13, 2016
Alice Nightingale took out about $48,000 in student loans when she was in her late 50s to obtain a master's degree that would allow her to obtain a job as a public school teacher. Due to serious health issues, she went on disability leave in 2012 and received monthly disability benefits until she retired in June of 2014. After retiring, she lived on an income of $1,645 a month, consisting of Social Security income and state retirement benefits.
In June 2013, Nightingale filed for bankruptcy and received a discharge. She then filed an adversary complaint in the bankruptcy court to discharge her student loans. North Carolina State Education Assistance Authority (NCSEAA), Nightingale's student-loan creditor, filed for summary judgment in 2014, arguing she was eligible for a long-term income-based repayment plan that would obligate her to pay zero on her student loans. Since paying nothing would not be an undue hardship on her, NCSEAA maintained, Nightingale was not entitled to a bankruptcy discharge.
Fortunately for Nightingale, Judge Benjamin A. Kahn, a North Carolina bankruptcy judge, denied NCSEAA's motion, pointing out that the creditor's reasoning would mean that the people who are most worthy of bankruptcy relief could never get it. Furthermore, the judge pointed out,"Participation in such a 'repayment' program in which [Nightingale's] monthly payment is zero is not repayment at all; rather, the loan continues to accrue interest on the principal without any repayment. At the end of the twenty-five year period, [Nightingale's] loans may be forgiven, but that amount, on which interest has been accruing, may become taxable as income."
The case then went to trial, and Judge Kahn entered his decision on January 16, 2016. The judge ruled that Nightingale met two prongs of the three-pronged Brunner test. First, she could not pay back her loans and maintain a minimal standard of living. Indeed, Judge Kahn ruled, "the unrebutted evidence demonstrated that [Nightingale] is currently incapable of making any material payment on the debts while maintaining a minimal standard of living."
Brunner's second prong required Nightingale to show that she had made good faith efforts to pay back her loan. Judge Kahn ruled that she met this prong as well. Nightingale had paid about $11,000 on he loans and was currently making income-based payments of $133 a month.
To obtain a bankruptcy discharge of her student loan, Nightingale was also required to pass the third-prong of the Brunner test by showing that exceptional circumstances prevented her from paying back her student loans in the future. In other words, she was obligated to show a "certainty of hopelessness" regarding her long-term financial circumstances.
Judge Kahn admitted that Nightingale's testimony supported a finding of exceptional circumstances. "Nightingale is elderly, has no job prospect in the field for which she was educated, lives on a meager budget, relies upon friends and family to provide shelter, and testified that she has additional medical disabilities that prevent her from returning to gainful employment." In fact, NCSEAA agreed that Nightingale's current situation was dire "and that she is barely able to remain healthy and in affordable housing, much less hold down a job."
But Judge Kahn ruled that Nightingale's own testimony about her chronic health problems was insufficient to show long-term financial distress without corroborating evidence. The judge indicated that corroborating evidence in the form of a letter from Nightingale's doctor about her health status would probably be sufficient and gave her 14 days to produce such a letter or other corroborating evidence of her health problems.
What is the significance of the Nightingale decision?
The Nightingale decision is significant for two reasons. First, Judge Benjamin Kahn flatly rejected a student-loan creditor's argument that Nightingale was ineligible for bankruptcy relief because she could enroll in a long-term income-based repayment plan that would require her to pay nothing due to her limited income. Had Judge Kahn adopted NCSEAA's argument, no student-loan debtor would be eligible for bankruptcy relief, at least not in Judge Kahn's court.
Second, the Nightingale decision demonstrates the difficulty distressed student loan debtors have when trying to discharge student loans in bankruptcy. First, Nightingale had to defeat NCSEAA's summary judgment motion, which took months to resolve. Second, she was required to round up corroborating evidence of her chronic health problems.
In many circumstances, it is entirely appropriate for a bankruptcy judge to require a student-loan debtor to provide proof of chronic health issues. As Judge Kahn correctly observed, when health problems are not obvious, corroborating evidence is necessary to avoid the possibility of fabrication and fraud.
But Alice Nightingale is 67 years old! She went on disability leave until she retired in 2014 and now lives on an income of only $1645 a month. Why was it necessary for her to provide corroborating evidence that chronic health issues prevent her from increasing her income in the future?
I don't mean to be too hard on Judge Kahn. He was obviously sympathetic to Nightingale's situation. After all, he denied NCSEAA's motion for summary judgment, and he gave Nightingale time to provide supporting evidence of her chronic health problems. I feel sure the judge will ultimately discharge Nightingale's student-loan debt.
Nevertheless, when an elderly person living on a small pension and a Social Security check comes into bankruptcy court to discharge her student loans, I believe she is entitled to a speedy discharge. Unfortunately for Alice Nightingale, her adversary proceeding lasted more than two years. And her case may still not be behind her. If Judge Kahn discharges her student-loan debt, as seems likely, NCSEAA may appeal.
Nightingale v. North Carolina State Educ. Assistance Authority, 543 B.R. 538 (Bankr. M.D.N.C. 2016) (ruling requiring Nightingale to provide corroborating evidence of her chronic health problems).
Nightingale v. North Carolina State Educ. Assistance Authority, 529 B.R. 641 (Bankr. M.D.N.C. 2015) (ruling on NCSEAA's motion for summary judgment).