Showing posts with label Hedlund v. Educational Resources Institute. Show all posts
Showing posts with label Hedlund v. Educational Resources Institute. Show all posts

Saturday, June 16, 2018

Are bankruptcy judges becoming more sympathetic toward student-loan debtors? Maybe but maybe not

Katy Stech Ferek published an article in Wall Street Journal a few days ago in which she reported that bankruptcy judges are becoming more sympathetic to debtors seeking to discharge their student loans in bankruptcy. Is Ferek correct?

I once would have thought so. Until recently, I believed the bankruptcy courts were becoming more compassionate toward bankrupt student debtors. But now I am not so sure.

Without question there have been some heartening developments in the federal bankruptcy courts over the past few years. At the appellate level, the Ninth Circuit Bankruptcy Appellate Panel discharged student loans owed by Janet Roth, an elderly student-loan debtor who was living on a monthly Social Security check of less than $800. Judge Jim Pappas, in a concurring opinion, argued sensibly that the courts should abandon the harsh Brunner test for determining when a debtor can discharge student loans under the Bankruptcy Code's "undue hardship" standard.

The Seventh Circuit, in its Krieger decision, discharged student debt of a woman in her fifties on undue hardship grounds, in spite of the fact that she had not enrolled in an income-based repayment plan. The court agreed with the bankruptcy court that Krieger's situation was hopeless. This too was a heartening decision for distressed student debtors.

Fern v. Fedloan Servicing, decided in 2017 is another good decision. In that case, the Eighth Circuit Bankruptcy Appellate Panel affirmed bankruptcy relief for a single mother, specifically noting the psychological stress experienced by debtors who know they will never pay off their student loans.

And there have been several good decisions in the lower courts. The Abney case out of Missouri, the Lamento case out of Ohio, the Myhre decision, and a handful of other recent decisions were compassionate rulings in favor of down-on-their-luck student debtors.

But a few warm days do not a summer make. Thus far, no federal appellate court has explicitly overruled the draconian Brunner test for determining when a student loan constitutes an undue hardship.

And there have been some shockingly harsh rulings against student debtors. In Butler v. Educational Credit Management Corporation, decided in 2016, a bankruptcy judge refused to discharge Brenda Butler's student debt, which had doubled in the twenty years since she had graduated from college, in spite of the fact she was unemployed and the judge had explicitly stated that she had handled her student loans in good faith. The judge ruled Butler should stay in a 25-year repayment plan that would end in 2037, more than forty years after she graduated from college!

Moreover, there simply have not been enough recently published bankruptcy-court rulings to constitute a trend. As Ferek reported in her article, federal judges in student-loan bankruptcy cases ruled only 16 times in 2017, and student loans were canceled in only three of those cases.

Even favorable rulings do not look quite so encouraging when examined closely.  Ferek mentioned the Murray case out of Kansas, in which a bankruptcy judge granted a partial discharge of a married couple's student-loan debts. This was a favorable ruling, but Educational Credit Management Corporation, the federal government's most ruthless debt collector, appealed. Fortunately for the Murrays, they were represented by an able Kansas lawyer; and the National Association of Consumer Bankruptcy Attorneys, joined by the National Consumer Law Center, filed an amicus brief on the Murrays' behalf. The Murrays prevailed on appeal, but most student-loan debtors do not have the legal resources the Murrays had.

Ferek wrote a useful article, and I hope distressed student-loan debtors read it and are encouraged. Nevertheless, the fact remains that very few insolvent college-loan borrowers get bankruptcy relief from their crushing student loans.  And those who have the courage to seek bankruptcy relief often have a long road to travel. Michael Hedlund, a law school graduate who won partial relief from his student debt in a Ninth Circuit ruling, litigated with his creditor for 10 years!


References

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

Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Katy Stech Ferek. Judges Wouldn't consider Forgiving Crippling Student Loans--Until Now. Wall Street Journal, June 14, 2018.

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

Hedlund v   Educational Resources Institute, Inc., 718 F.3d 848 (9th Cir. 2013).

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (7th Cir. 2013).

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

Murray v. Educational Credit Management Corporation563 B.R. 52 (Bankr. D. Kan. 2016), aff'd, Case No. 16-2838 (D. Kan. Sept. 22, 2017).

Myhre v. U.S. Department of Education, 503 B.R. 698; 2013 (Bankr. W.D. Wis. 2013). 

Roth v. Educational Credit Management Corporation490 B.R. 908 (9th Cir. B.A.P. 2013). 


Tuesday, July 17, 2012

The Underemployed Law School Graduate With Massive Student-Loan Obligations: The Hedlund Bankruptcy Case

Almost 37 million people owe money on their college loans, and millions are in default or behind on their loan payments (Brown et al. 2012). Most overburdened student-loan debtors suffer their college-loan debt in silence, and the public is generally unaware of their plight. In a few cases, however, student-loan debtors file for bankruptcy, seeking a discharge from the loan obligations. Often the court decisions in these cases provide details of a particular student-loan debtor’s financial situation.  In particular, the Hedlund case (2012) provides a window into the world of the underemployed law-school graduate who is swamped by massive student-loan obligations.
A Young Man Borrows Money to Go to Law School But Can’t Pay Back the Loans
In the early 1990s, Michael Eric Hedlund borrowed more than $85,000 to go to law school. It must have seemed like a good idea at the time. Michael’s father and brother were attorneys, and he anticipated going to work in his father’s law firm.
Things did not work out as Michael hoped. After graduating from Willamette University’s law school in 1997, Michael took a job in the District Attorney’s office in Klamath Falls, Oregon. He planned to work there for a couple of years and then join his father’s law firm. Unfortunately, Michael failed the bar exam twice. Unable to practice law, he received several extensions on his loan obligations. He applied for a student-loan consolidation, but was told he was ineligible for consolidation because he was not current on his loan payments.
In 1999, Michael found a job as a juvenile counselor, which paid him about $40,000 a year.  His monthly loan payments were $800, which he did not pay regularly. In fact, he only made one loan payment.  In 2002, two loan creditors began garnishing his wages; and in May 2003, Michael filed for bankruptcy.
Michael’s bankruptcy proceedings stretched on for years. In fact, the original bankruptcy judge who presided over his case died before the case was resolved. In March 2012--nine years after Michael filed for bankruptcy, a federal district court ruled that Michael was not entitled to discharge his student loans in bankruptcy.  According Judge Ann Aiken, Michael was not entitled to bankruptcy relief because he had not made a good-faith effort to pay on his loans.
The Pathetic Plight of Many Law School Graduates
Although Judge Aiken rejected Michael’s plea to have his student loans discharged, she was not unsympathetic.  Judge Aiken pointed out that law school tuition rose more than three hundred percent between 1989 and 2009, which is twice the rate of inflation for that period and four times the rate of job growth. “Accordingly,” Judge Aiken observed, “with the exception of the independently wealthy, students must take out loans in order to finance their [law] degrees” (p. 907).
Meanwhile, as tuition costs keep going up, wages for beginning attorney are going down. Citing a report by the National Association for Law Placement, Judge Aiken pointed out that annual compensation for first-year associate attorneys in private practice went down in 2010.  In addition, the demand for new attorneys is shrinking. According to Judge Aiken, “The most recent statistics indicate that, through the year 2018, there will only be 25,000 openings for the law schools’ 45,000 new graduates each year” (p. 907).
In Judge Aiken’s opinion, “[T]he current higher education system is untenable and unsustainable; as a result, increasing numbers of students will be forced to file for bankruptcy” (p. 908). In the judge’s view, the student loan issue--she did not use the word “crisis”--needs to be addressed at a systematic level.
What is the Significance of the Hedlund Case?
Judge Aiken’s opinion in the Hedlund case paints a poignant picture of the plight of underemployed law-school graduate who borrowed heavily to attend law school.  As Judge Aiken pointed out, law school tuitions are now so high that most people must borrow money--a lot of money--to get a legal education. A few years ago, borrowing money to get a law degree was a good bet, but the demand for new lawyers is shrinking and salaries for beginning attorneys are going down.  Thousands of law school graduates are finding themselves underemployed in jobs outside the legal field and unable to pay back their student loans.  Obviously, this is a huge national problem, not only for law-school graduates, but for law schools and for the legal profession as well. 
Under federal bankruptcy law, student-loan debtors cannot discharge their student loans in bankruptcy unless they can show “undue hardship.”  Most law-school graduates are able to find some kind of employment and thus will not qualify for a bankruptcy discharge under this rigorous standard.  Mr. Hedlund, for example, found a non-legal job paying $about 40,000.
Nevertheless, most underemployed law school graduates who have massive student loans will be in dire economic circumstances.  Mr. Hedlund was obligated to pay $800 a month on his loans after he graduated, almost an impossible burden for someone making $40,000 a year.
Unable to discharge their student loans in bankruptcy, a lot of underemployed law-school graduates will be forced to apply for an Income-Based Repayment plan (IBR) in order to manage their loan obligations. Under an IBR, as modified by the Obama administration, debtors will obligate themselves to pay 10 percent of their discretionary income for a period of 20 years (White House, 2012).
Obviously, IBR plans are not an ideal solution for law-school graduates who can’t find well-paying jobs. Instead of beginning good careers practicing law, many graduates will wind up being long-term indentured servants to the government, forking over a percentage of their income over a 20-year period. If Michael Hedlund ultimately chooses the IBR option, he won’t be free of his law-school loan obligations until he is in his 60s.  Somehow, that does not seem fair.
References
Brown, M., Haughwout, A., Lee, D., & Mabutas, M. (2012). Grading student loans.  Federal Reserve Bank of New York.
Hedlund v. Educational Resources Institute, Inc., 468 B.R. 901 (D. Or. 2012).
White House, Office of Press Secretary (2012, June 6). Fact Sheet: Helping Americans manage student loan debt with improvements to repayment options. Retrieved from: http://www.whitehouse.gov/the-press-office/2012/06/06/fact-sheet-helping-americans-manage-student-loan-debt-improvements-repay