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

Sunday, January 31, 2016

Brenda Butler,"poster child" for the student-loan crisis, will be done with her student loans in 2037--42 years after she graduated from college

    You load sixteen tons, what do you get?
    Another day older and deeper in debt
    Saint Peter don't you call me 'cause I can't go
    I owe my soul to the company store
Tennessee Ernie Ford

If the student-loan crisis had a poster child, it might well be Brenda Butler, who lost her bankruptcy case last week in Illinois. Butler borrowed about $14,000 to get a degree in English and creative writing from Chapman University, which she received in 1995. Over the next 20 years, she made loan payments totally $15,000--more than the amount she borrowed.

Unfortunately, she was unable to make payments from time to time, and her debt grew due to accrued interest and penalties. When she filed for bankruptcy in 2014, Butler's debt had grown to almost $33,000, more than twice what she borrowed!

Did Butler get rich in the 21 years that passed since she graduated from college? No, she didn't. When she filed for bankruptcy she owned no real property and drove a 2001 Saturn that had logged 147,000 miles. According to the bankruptcy court, Butler never made more than about $35,000 a year, and her monthly income at the time of her bankruptcy filing was only $1,879, about $300 less than her expenses.

In spite of her bleak financial situation and an employment history of relatively low wages, a bankruptcy judge refused to discharge Ms. Butler's student loans. In fact, in applying the three-prong Brunner test, the court ruled that she failed to meet two of the prongs.

First, the court concluded that Butler was able to maintain a minimum standard of living, in spite of the fact that she was living on unemployment benefits at the time of her hearing and these benefits were about to run out. Indeed, the court admitted that Butler "had virtually no resources to support herself."

Nevertheless, in the court's view, Butler would likely find employment soon, which would enable her to maintain a minimum standard of living and make payments under an income-base repayment plan. Thus, Butler failed the first prong of the Brunner test.

Brunner's second prong required Butler to show that additional circumstances existed that prevented her from paying on her student loans in the future. Here again, the judge ruled against her. The judge found Butler to be "capable and intelligent with no health problems or other impediments to being gainfully employed." The court acknowledged that Butler had "an unfortunate employment history through no apparent fault of her own," but she could show no exceptional circumstances that would indicate that she could not pay back her student loans in the coming years.

Interestingly, the judge ruled in Butler's favor regarding one prong of the Brunner test. In the judge's view, Butler had met her burden of showing she had made good faith efforts to pay back her loans. As the judge acknowledged, Butler had made payments totally more than the original principal on her loans, and she had made diligent efforts to improve her financial status. "This is not a case of a recent graduate trying to escape student loan debts before beginning a lucrative career," the judge admitted. On the contrary, Butler had made "substantial, though futile, efforts to pay down her student loan debt."

So why did Butler lose her case? This is the bankruptcy judge's summary:
[Butler's] financial situation is unfortunate, but more than that is required for a finding of undue hardship under the demanding Brunner test. [Butler] has shown good faith in her efforts to remain employed and pay down her student loan debt. But as a healthy, intelligent, relatively young worker with a proven ability to secure productive employment, [she] is unable to prove that her student loan obligations prevent her from maintaining a minimum standard of living, now or in the foreseeable future. Thus. . ., [Butler's] student loan debt will not be discharged.
The Butler decision is particularly unfortunate because her situation is not untypical. Like a lot of people, she obtained a liberal arts degree from a private college that never led to a well-paying job. In spite of good faith efforts to pay back her loans, she was dragged down by exorbitant penalties and accruing interest, like thousands of other Americans.

And here is the final outcome. Brenda Butler will continue in a long-term income-based repayment plan that will not conclude until 2037--42 years after she graduated from college! 

Surely this is not what Brenda Butler envisioned when she enrolled at Chapman University in 1991 with bright hopes for a future as a writer.  And surely this is not what Congress envisioned when it passed the Higher Education Act more than 50 years ago.

And that is why Brenda Butler would make a good poster child for the student-loan crisis. A good person, who went to college in good faith and made good faith efforts to pay back her student loans, will be burdened with student-loan debt--mostly penalties and interest--until she reaches retirement age.

References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).




Wednesday, January 6, 2016

Tetzlaff v. Educational Credit Management Corporation: The Seventh Circuit made a mistake when it refused to discharge a quarter of a million dollars in student-loan debt owed by an umemployed 56-year old man living on his mother's Social Security check

The Seventh Circuit Court of Appeals got it wrong when it affirmed a lower court ruling against Mark Tetzlaff, an unemployed 56 year-old man who tried to discharge $260,000 of student-loan debt in bankruptcy. Mr. Tetzlaff filed a petition for certiorari in October with the U.S. Supreme Court, seeking to have the Seventh Circuit's decision overturned. I hope the Supreme Court agrees to hear his case.

The Seventh Circuit applied the Brunner test too harshly.

In ruling against Tetzlaff, the Seventh Circuit determined that requiring Tetzlaff to repay more than a quarter of a million dollars in student-loan debt would not cause him "undue hardship." To reach this bizarre conclusion, the court applied the three-part Brunner test, which required Tetzlaff to show:
1) [He could] not maintain, based on current income and expenses, a minimal standard of living . . . if forced to repay [his] loan;
 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period;
3) [he] made good faith efforts to repay the loans. 
 At the time Tetzlaff filed his adversary hearing, he was 56 years old, unemployed, and living with his mother. Both he and his mother subsisted entirely on his mother's Social Security check. Thus, the court admitted that Tetzlaff met the first prong of the Brunner test: he could not pay back his student loans and maintain a minimal standard of living.

But the Seventh Circuit panel ruled that Tetzlaff had not meet the second prong of the Brunner test.  According to the court,Tetzlaff was required to show "the certainty of hopelessness" concerning his financial future.  In essence, the court predicted that Tetzlaff's financial situation will probably improve. After all, the court noted, "he has an MBA, is a good writer, is intelligent, and family issues are largely over" (quoting the lower court's opinion).

Moreover, in the Seventh Circuit's view, Tetzlaff had not made good faith efforts to pay back his loans, a requirement of the Brunner test's third prong.

Although Tetzlaff may not have made sufficient efforts to repay the $260,000 he was trying to discharge in bankruptcy, he had also borrowed money to attend Florida Coastal Law School; and he had paid back his law school loans. Tetzlaff argued in court that his successful effort to pay off his law-school loans showed his good faith,

But the Seventh Circuit did not buy Tetzlaff's argument.  In the court's view, Tetzlaff had not made a good faith effort to repay the $260,000 he owed to Educational Credit Management Corporation, the agency that was fighting Tetzlaff's bankruptcy discharge. Thus he failed the third prong of the Brunner test.

Where the Seventh Circuit went wrong: Low Job Prospects for Law Graduates

In my view, the Seventh Circuit erred when it refused to discharge Tetzlaff's student loan debt. 

First of all, a 56-year old man who is unemployed and has significant mental health issues (as he testified in court) will never pay back more than a quarter of a million in student-loan debt--a debt that is growing larger by the day due to accrued interest. The court would have ruled more realistically and more compassionately if it had applied the principle laid down by the Ninth Circuit's Bankruptcy Appellate Panel in its 2013 Roth decision: "[T]he law does not require a party to engage in futile acts." 

It is true Tetzlaff holds an MBA and a law degree, but these credentials are no guarantee of a good job, particularly given his age, his employment history, and his mental health issues. In fact, Tetzlaff's law degree may be almost worthless.  

As Paul Campos wrote in his 2012 book, Don't Go To Law School (Unless), the job market for lawyers is terrible. Indeed, Campos observed, "[L]aw schools are now producing more than two graduates for every available job."

And Tetzlaff's prospects for a legal job are especially dire since he failed the bar exam twice. In addition, he graduated from Florida Coastal Law School, one of the nation's bottom-tier law schools with very low admissions standard. According to Law School Transparency, a public interest group, 50 percent of Florida Coastal's 2014 entering class were at extreme risk of failing the bar exam based on their LSAT scores.

Law School Transparency pointed out that graduates of law schools with low admission standards have a much harder time obtaining employment than graduates from more prestigious law schools. "Legal job rates are considerably worse at the serious risk schools," Law School Transparency's report stated. "A serious risk school is 4 times as likely to have a below average legal job rate. Nearly three-quarters of schools with employment rates below 50% were serious risk schools."

Law School Transparency's recent report shows that borrowing money to attend a law school with low admissions standards is not a good bet. "Based on available salary data from serious risk schools, graduates from these programs cannot service their debts without generous federal hardship programs."

Nevertheless, Tetzlaff was wise to pay off his law-school debt first, since the law school would not release his diploma to him unless he paid that debt. And without a diploma, he would be unable to take the bar exam. In fact, Tetzlaff had no real choice in prioritizing his law school debt over his other student loan debt.

It is truly unfortunate that the Seventh Circuit showed both lack of compassion and lack of understanding by penalizing Mr. Tetzlaff for making the only sensible financial decision he could make.  He simply had to make paying his law-school debt a priority in order to have any hope of ever practicing law.

The Court Should Not Have Allowed ECMC to accuse Tetzlaff of being a malingerer

Educational Credit Management Corporation, perhaps the nation's most heartless and ruthless student-loan debt collector, opposed the discharge of Tetzlaff's student-loan debt, and it hired Dr. Marc Ackerman, a forensic psychologist, to bolster its case. Ackerman performed tests on Tetzlaff and testified that Tetzlaff "'scored very high on several malingering scales,' indicting that Tetzlaff was perhaps feigning his psychological symptoms."

I find it outrageous that Educational Credit Management Corporation's hired a forensic psychologist as a means of suggesting Tetzlaff is a malingerer. ECMC has fought bankruptcy relief for distressed student-loan debtors all over the United States, and its chief executives have grown rich in the debt collection business. For ECMC to force an unemployed man in his mid-50s to take a psychological exam in a bankruptcy proceeding to determine whether he is a malinger is detestable.

It is true that Tetzlaff introduced testimony about his mental health issues, but I don't think that gives ECMC license to use an expert witness to essentially attack his character. In my opinion, the bankruptcy court should have excluded the forensic psychologist's opinion on the grounds of common decency.

And if we are going to be looking into people's mental health, let's check the mental health status of the ECMC officials who opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living solely on the income of a $774 Social Security check. Anyone who would persecute Jane Roth must have serious mental health problems--let's call it chronic undifferentiated greed.

Conclusion: The  Seventh Circuit committed a grave error in deciding the Tetzlaff case

The Tetzlaff decision was a bad decision. Mr. Tetzlaff should be commended for trying to improve his economic prospects by obtaining graduate education, and he should not be penalized because some of his educational choices may have been misguided.

Mr. Tetzlaff probably made a mistake when he borrowed money to attend Florida Coastal Law School.  But he should not suffer a lifetime penalty for mistakes he made in his good faith efforts to obtain an education. And people in bankruptcy should not be required to take psychological tests to determine whether they are malingers.

The Department of Education needs to rein in Educational Credit Management Corporation by insisting that it not oppose bankruptcy relief for people like Mark Tetzlaff. Unless it does that, DOE simply cannot continue to say with any credibility that it is trying to relieve the distress of millions of people who are unable to pay back their student loans.

References

Paul Campos. Don't Go To Law School (Unless). Self-published, 2012.
Roth v Educational Credit Management Corp, 490 B.R. 908, 920 (9th Cir. BAP 2013).
Law School Transparency. 2015 State of Legal Education. Accessible at: http://lawschooltransparency.com/reform/projects/investigations/2015/
John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html
Tetzlaff v. Educational Credit Management Corporation, 794 F.3d 756 (7th Cir. 2015). Accesible at: http://scholar.google.com/scholar_case?case=900247726541956067&hl=en&as_sdt=6&as_vis=1&oi=scholarr