Martin v. ECMC: Iowa bankruptcy judge discharges unemployed lawyer's student loans

In Martin v.  Educational Credit Management Corporation (ECMC), decided last February, Janeese Martin obtained a bankruptcy discharge of her student-loan debt totally $230,000. Judge Thad Collin’s decision in the case is probably most significant for the rationale he articulated when he rejected ECMC’s argument that Martin should be placed in a 20- or 25-year, income-based repayment plan (IBRP) rather than given a discharge.

Citing previous decisions, Judge Collins said an IBRP is inappropriate for a 50-year-old debtor who would be 70 or 75 years old when her IBRP would come to an end. An IBRP would injure Martin’s credit rating and cause her mental and emotional hardship, the judge wrote. In addition, an IBRP could lead to a massive tax bill when Martin's plan terminated in 20 or 25 years, when she would be "in the midst" of retirement.

Janeese Martin, a 1991 law-school graduate, is unable to find a good law job

Janeese Martin graduated from University of South Dakota School of Law in 1991 and passed the South Dakota bar exam the following year. In spite of the fact that she held a law degree and a master's degree in public administration, Martin never found a good job in the field of law. 

Martin financed her undergraduate studies and two advanced degrees with student loans totally $48,817. In 1993, she consolidated her loans at an interest rate of 9 percent; and she made regular payments on those loans from 1994-1996. 

Over the years, there were times when Martin could make no payments on her student loans, but she obtained various kinds of deferments that allowed her to skip monthly payments while interest accrued on her loan balance. By 2016, when Martin and her husband filed for bankruptcy, her student-loan debt had grown to $230,000--more than four times what she borrowed.

As Judge Collins noted in his 2018 opinion, Janeese Martin was 50 years old and unemployed. Her husband Stephen was 66 years old and employed as a maintenance man and dishwasher at a local cafe. The couple supported two adult children who were studying at the University of South Dakota and had student loans of their own. The family's annual income for 2016 was $39,243, which came from three sources: Stephen's cafe job, his pension and his Social Security income.

Judge Collins reviewed Janeese's petition to discharge her student loans under the "totality of circumstances" test, which is the standard used by the Eighth Circuit Court of Appeals for determining when student loans constitute an "undue hardship" and can be discharged through bankruptcy. 

Martin's Past, Present, and Reasonably Reliable Future Financial Resources

Judge Collins surveyed Martin's employment history since she completed law school. In addition to three years working for a legal aid clinic, Martin had worked eight years with the Taxpayer's Research Council, a nonprofit agency located in Iowa.  Her maximum salary in that job had paid only $31,000, and Martin was forced to give up her job in 2008 when her family moved to South Dakota.

ECMC, which intervened in Martin's suit as a creditor, argued that Martin had only made "half-hearted" efforts to find employment, but Judge Collins disagreed. Martin "testified very credibly that she wants to work and has applied for hundreds of jobs," Judge Collins wrote. Nevertheless, in the nine years since her last job, Martin had only received a few interviews and no job offers. 

Judge Collins acknowledged that Martin had two advanced degrees, but neither had been acquired recently. In spite of her diligent efforts to find employment, the judge wrote, she was unlikely to find a job in the legal field that would give her sufficient income to make significant payments on her student loan.

Martin's Reasonable and Necessary Living Expenses

Judge Collins itemized the Martin family's monthly expenses, which totaled about $3,500 a month. These expenses were reasonable, the judge concluded, and slightly exceeded the family's monthly income. Virtually all expenses "go toward food, shelter, clothing, medical treatment, and other expenses reasonably necessary to maintain a minimal standard of living," Judge Collins ruled, and "weigh in favor of discharge" (p. 893).

Other Relevant Facts and Circumstances

ECMC argued, as it nearly always does in student-loan bankruptcy cases, that Martin should be placed in a 20- or 25-year income-based repayment plan rather than given a bankruptcy discharge. The Martin family's income was so low, ECMC pointed out, that Martin's monthly payments would be zero. 

Judge Collins' rejected ECMC's arguments, citing two recent federal court opinions: the 2015 Abney decision, and Judge Collins' own 2016 decision in Fern v. FedLoan Servicing. “When considering income-based repayment plans under § 523(a)(8),” Judge Collins wrote, “the Court must be mindful of both the likelihood of a debtor making significant payment under the income-based repayment plan, and also of the additional hardships which may be imposed by these programs” (p. 894, internal punctuation omitted).

These hardships, Judge Collins noted, include the effect on the debtor’s ability to obtain credit in the future, the mental and emotional impact of allowing the size of the debt to grow under an IBRP, and “the likely tax consequences to the debtor when the debt is ultimately canceled” (p. 894, internal citation and punctuation omitted).

In Judge Collins’ view, an IBRP was simply inappropriate for Janeese Martin, who was 50 years old:

If she were to sign up for an IBRP, she would be 70 or 75 when her debt was ultimately canceled. The tax liability could wipe out all of [Martin’s] assets not as she is approaching retirement, but as she is in the midst of it. If [Martin] enters an IBRP, not only would she have the stress of her debt continuing to grow, but she would have to live with the knowledge that any assets she manages to save could very well be wiped out when she is in her 70s. (p. 894)

Conclusion

Martin v. ECMC is at least the fourth federal court opinion which has considered the emotional and mental stress that IBRPs inflict on student-loan debtors who are forced into long-term repayment plans that cause their total indebtedness to grow. Together, Judge Collins' Martin decision, Abney v. U.S. Department of Education, Fern v. FedLoan Servicing, and Halverson v. U.S. Department of Education irrefutably argue that the harm IBRPs inflict on distressed student debtors outweighs any benefit the federal government might receive by forcing Americans to pay on student loans for 20 or even 25 years--loans that almost certainly will never be paid off.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).