Federal bankruptcy courts have decided a number of cases over the years involving student-loan debtors seeking to wipe out their student loans by filing for bankruptcy. In some cases, the courts have discharged people's student loan debt; and in other cases, the courts have refused a discharge. And the results aren't consistent.
For example, in the Hedlund
case, the Ninth Circuit Court of Appeals granted partial relief to Michael Hedlund, a relatively young law-school graduate who had failed to pass the bar exam. But recently, in the Tetzlaff
case, the Eighth Circuit refused to grant relief to an older law-school graduate who had also failed the bar and who had a much larger student-loan debt than Mr. Hedlund.
Likewise, just last week, an Alabama bankruptcy court refused to discharge student loan debt owed by a grandfather who had borrowed money back in the 1990s for a degree program he never completed even though the man was living with his wife on $2,000 a month and was broke enough to have his other debts discharged. But another Alabama bankruptcy judge discharged the student-loan debt of a woman in her 40s who had a pretty good job.
In this essay, I am going to try to give at least some partial answers to two questions:
- First, when will the Department of Education and its loan collection agencies agree to allow a student-loan debtor to discharge student-loan debt in bankruptcy? In other words, how bad does a debtor's financial situation need to be before DOE will tell a bankruptcy court that it will not oppose the discharge of student loan debt?
- Second, what factors seem to weigh in the debtor's favor when trying to discharge student loans in a bankruptcy court proceeding?
I. DOE and Student-Loan Creditors Oppose Bankruptcy Relief For Nearly Everyone
Regarding the first question, DOE stated in a July 2015 letter that it would not oppose bankruptcy discharge in certain situations, and it listed 11 factors it would consider when deciding whether or not to agree to a discharge. Those factors are what you might suppose and include the debtor's age, health status and long-term economic prospects. Supposedly, DOE won't oppose bankruptcy discharge for elderly people living on Social Security or people with very serious health problems.
In practice, however, DOE and its debt-collection agencies oppose bankruptcy relief for nearly everyone--even people who are ill and flat broke. DOE's standard line is that everyone should be forced into a long-term income-based repayment plan, even when it is clear the debtor is so poor that that he or she will never be required to pay anything.
For example, in the Myhre case, DOE opposed bankruptcy relief for a quadriplegic man who was gainfully employed but whose expenses exceeded his income because he had to employ a full-time caregiver to feed and dress him and drive him back and forth to work. A quadriplegic, for God's sake! Fortunately, the court rejected DOE's arguments and ruled for Mr. Myhre.
In the Roth case, Educational Credit Management Corporation (DOE's most ruthless collection agent) opposed bankruptcy relief for Jane Roth, a 68-year old woman with chronic health problems who was living on less than $800 a month. Put her in a 25-year repayment plan, ECMC argued, even though it was apparent that Roth would never be able to pay back her student loans.
In the Abney case, DOE opposed relief for Michael Abney, a 40-year old man who was so poor he couldn't afford a car and road a bicycle to work. Abney was living on $1200 a month, and the bankruptcy court ruled that his long-term economic prospects were not likely to improve any time soon. Put him on a long-term repayment plan, DOE insisted; but the bankruptcy court sided with Mr. Abney and discharged his student-loan debt.
And just last week, ECMC persuaded an Illinois bankruptcy court to keep Brenda Butler in a 25-year repayment plan that she won't complete until 2037--42 years after she graduated from college! And by the way, Butler was unemployed at the time of her adversary proceeding.
So if you read DOE's July 2015 letter, just ignore it. In spite of representations by Deputy Assistant Secretary of Education Lynn Mahaffie that DOE won't oppose bankruptcy relief in some instances, in reality, DOE DOESN'T WANT ANYONE TO GET BANKRUPTCY RELIEF. DOE wants virtually everyone in a 20- or 25-year repayment plan--even if that means people will be saddled with student-loan debt into their 90s.
II. What Can You Do To Increase Your Odds of Obtaining a Discharge of Your Student-Loan Debt?
Now let's turn to the second question: What factors weigh in a person's favor when trying to discharge student-loan debt in a bankruptcy court? There have been several scholarly articles on this topic--Rafael Pardo's work is especially helpful. By and large, the research tells us that people with serious long-term health issues are more likely to obtain relief than people in good health. And it helps to have a competent lawyer.
But a friend of mine has gone to the trouble of calling some of the people who have tried to discharge their student-loan debt in bankruptcy over the past two yeas, and he's briefed me on what he learned. This is what I've gleaned from these conversations:
First, it helps to prepare well in advance of filing your adversary complaint and to be able to document all student-loan payments that you made and all medical issues that are relevant. In my opinion, it makes sense to file a complaint that contains a lot of detail. Filing a detailed complaint may help educate the bankruptcy judge about your circumstances early in the litigation instead of on the day of trial.
Second, if you are representing yourself and don't have an attorney, be wary of agreeing to anything the creditor's attorney suggests. For example, in a recent case, a Department of Education attorney persuaded a debtor to agree that it would not be an "undue hardship" to pay back his student loans, even though the guy was in bankruptcy for that very reason. The debtor wasn't aware that by agreeing to what the attorney suggested, he had lost his case. And in fact, case law would have supported an argument that indeed it would have been an undue hardship to repay his student loans.
Third, it is good to have an attorney, but your attorney must know the law--especially the recent cases that have ruled more compassionately toward student-loan debtors. In another recent case--a real heart breaker, an unemployed woman in her 40s, who had made good faith efforts to pay on her student loans for 20 years, got locked into a 25-year repayment plan that won't conclude until she is in her 60s. Apparently, the judge was never made aware that courts have granted relief to several people within the last 2 years whose financial situations were far better than hers.
Whether or not you have an attorney, you must know the law. Find out whether you are in a jurisdiction that follows the three-pronged Brunner test for determining whether it would be an undue hardship for a debtor to pay back student loans or whether you are in a jurisdiction that has adopted the "totality of circumstances" test.
You should be aware that most judges won't require you to have lived on bread and water in order to qualify for a discharge of your student loans. For example, several courts have rejected creditors' arguments that student-loan debtors are not living frugally if they have a cell phone, an Internet account, or a pet. If your creditor makes that argument (and it will), it would be good to be able to cite those cases.
You should be able to tell the judge that several courts in the Brunner jurisdictions have refused to interpret the Brunner test harshly and some have even criticized the test. You should point out those cases to your judge in your trial brief.
Finally, you should know the cases in which judges have refused to force distressed student-loan debtors into 25-year repayment plans. A couple of courts have pointed out the psychological stress that a long-term repayment plan can have on a person. It is essential for you to be able to educate your judge about court decisions that have rejected the creditors' stock argument, which is to force everyone into long-term repayment plans.
III. Remember--Your Judge May Be Sympathetic
Finally, you should know that there factors at work that are beyond a student-loan debtor's control--the temperament of the bankruptcy judge. I think many of these judges are inclined to be sympathetic toward student-loan debtors--many of whom have been crushed not by their loans but by the creditors' collection fees and accruing interest. I believe many of these judges want to help you. After all, the bankruptcy judges know that the bankruptcy courts exist in order to give honest but unfortunate debtors a fresh start.
And it is also evident that some bankruptcy judges are willing to do a lot of research and to write impressively reasoned decisions in favor of student-loan debtors. The judge in Acosta-Coniff v. ECMC , the judge in Johnson v. Sallie Mae, and the judge in Abney v. Department of Education went to a lot of trouble to write decisions in favor of student-loan debtors that will have a good chance of being upheld by the appellate courts if a creditor appeals. But you can help your judge tremendously if you can point out recent cases in your trial brief that have been decided recently in favor of student-loan debtors whose cases are similar to yours.
Trying to discharge your student loans in bankruptcy is a daunting challenge. You will be opposed by squadrons of creditors' attorneys who know the law and who show no mercy. And if you win, the creditors are likely to appeal, hoping they will wear you down and you will simply give up.
But I believe in my heart that the winds of justice are blowing through the bankruptcy courts and that many bankruptcy judges are willing to help you if you have a good case. But, to repeat myself, you will help your judge tremendously if you educate the judges to the recent favorable decisions--Roth, Krieger, and more than a dozen others.
If you are a distressed student-loan debtor with a reasonable case for discharge, go to the bankruptcy court and plead for justice. You have a good chance of getting the justice you deserve.
As they sometimes say in the Southwest, vaya con Dios.