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).