In re Standish: Should you be required to use your inheritance to pay off student debt?

 Martha Standish took out student loans when she was in her late 40s to get an undergraduate degree in accounting. Later she took out a Parent Plus Loan to help her daughter with college expenses.

Eleven years after graduating, Standish filed an adversary proceeding in a Kansas bankruptcy court seeking to discharge about $30,000 in student loans. By this time, she was 63 years old. She made $18.36 an hour working at an engineering firm, and her expenses slightly exceeded her income.

Bankruptcy Judge Robert Berger applied the Brunner test in deciding whether Ms. Standish qualified to have her student loans discharged under the Bankruptcy Code's "undue hardship" rule.  To be entitled to a student-loan discharge, Standish was required to make three showings:

1) "[S]he cannot maintain a minimal standard of living for herself and her dependents if forced to repay her student loans."

2)  "[A]dditional circumstances exist indicating that this state of affairs will persist [for] a significant portion of the repayment period . . . ."

3) "[S]he made good faith efforts to repay her loans."

After an extensive analysis, Judge Berger ruled in Standish's favor on two parts of the three-part Brunner test.  

First, he ruled that Standish could not maintain a minimal standard of living and make payments on her student loans. Thus, she met the first part of the Brunner test.

Second, Judge Berger ruled that Standish's dismal economic circumstances were unlikely to improve enough for her to pay off her student loans in the future. "As her age advances and her health deteriorates, she will soon reach a point at which her continuing employment is no longer possible," the judge observed. Moreover, Standish was unlikely to see her income go up. Based on these facts, Judge Berger ruled that Standish met the second part of the Brunner test.

Finally, regarding Brunner's "good faith" prong, Judge Brunner noted approvingly that Standish had "diligently minimized her expenses while maximizing the income she could earn with her degree." She also made payments on some of her loans while deferring others.

Nevertheless, Judge Berger ruled that Standish failed the good-faith prong of the Brunner test. 

Why? Because she received an inheritance and did not use the inheritance money to pay off her student loans. Instead, she used her inheritance to help pay for her daughter's education and other expenses. 

As Judge Berger explained:

[Standish's] decision to dedicate her inheritance to her daughter's education and other expenses prohibits the Court from finding that her pursuit of a discharge is in good faith. [Standish] received around $45,000 from her mother's estate. None of that money was used to pay the student loans. It is notable that this money would have been enough to pay off all or almost all her student loans.

Judge Berger clearly sympathized with Ms. Standish. He ruled in her favor on two parts of the Brunner test and only ruled against her on the good-faith standard because of her inheritance. "It is a tragic irony,' Judge Berger wrote, "that [Standish's] very efforts to relieve her daughter of the financial enserfment caused by student loan debt doomed her effort to discharge her own student loans."

Millions of Americans are burdened by student loans that prevent them from buying a home or saving for retirement. Some are probably counting on an inheritance to offset the catastrophe of their student debt.

But Judge Berger's decision--which is in harmony with current law--should be a wake-up call to student debtors who believe an inheritance will allow them to retire with dignity despite crushing student debt. As the Standish decision illustrates, an inheritance might foreclose bankruptcy relief for student borrowers even if they are otherwise qualified for relief under Brunner.

And--even more chilling to think about--the feds might try to garnish inheritance money from people who defaulted on their student loans. To my knowledge, this has not happened yet, but that possibility should not be discounted. 

Just another reason why Congress should amend the Bankruptcy Code and allow honest debtors to discharge their student loans in bankruptcy like any other nonsecured debt.

References

In re Standish, 628 B.R. 692 (Bankr. D. Kan. 2020).

In re Engen: Nondischargable student loans create a "prison of emotional confinement"

Bankruptcy Judge Robert Berger issued an opinion in 2016 that deserves to be better known than it is. Although the substance of Judge Berger's decision focused on an arcane provision of bankruptcy law, it also contains a trenchant summary of the misery that has been inflicted on millions of Americans by the federal student loan program.

In re Engen concerns Mark and Maureen Engen, a married couple who filed for bankruptcy under Chapter 13. Mr. and Mrs. Engen submitted a plan to pay creditors about $5,000 a month over five years. Under their plan, the Engens would completely pay off the first mortgage on their home, a car loan, and state and federal taxes. In addition, the Engens would make payments to nonsecured debtors who would only receive partial repayment.

In their plan, the Engens categorized their student-loan debt as a separate class of unsecured creditors and proposed to pay off this debt completely (without interest) before making payments on other unsecured claims (p. 529). The trustee in the Engens' case objected to giving student loans preferential treatment.

In a well-reasoned opinion, Judge Berger approved the Engens' repayment plan over the trustee's objection and explained why it was appropriate to categorize student loans as a separate class of unsecured debt.

First of all, Judge Berger explained, student-loan debt is a particularly onerous debt because it is quite difficult to discharge in bankruptcy.  Bankrupt debtors must file an adversary proceeding to discharge their student loans, and "[t]his bankruptcy litigation is sufficiently expensive and . . . so demanding, that debtors rarely even try to have student loan debt discharged" (p. 531, internal punctuation and citation omitted).

Indeed, a debtor's attempt to discharge student-loan debt is generally "an exercise in futility," with debtors forced to overcome what amounts to an "assumption of criminality" in order to obtain relief (p. 57, internal citation omitted).

In Judge Berger's opinion, the hardships associated with student-loan debt justify treating it as a separate classification in a Chapter 13 repayment plan. In fact, in some instances, lumping student loans with other unsecured debt would cause debtors to owe more on their student loans after bankruptcy than before they filed for bankruptcy relief.

Judge Berger then turned to an extended discussion of the pernicious quality of student-loan debt in the United States. Student loans, he observed, have caused many college graduates to delay marriage, defer car purchases, postpone home ownership, and put off saving for retirement.  Student debt is becoming a growing concern for older Americans, with more than a quarter of student loans held by debtors age 65-74 in default.

Judge Berger went on to articulate the grave harm suffered by distressed student-loan debtors who are unable to discharge their loans in bankruptcy. "Nondischargeable student loans may create a virtual debtors' prison," he wrote, "one without physical containment but assuredly a prison of emotional confinement" (p. 550).

Finally, Judge Berger ended his opinion with the forceful argument that bankruptcy relief benefits not just the distressed debtor; it also benefits society.

It is this Court's opinion that many consumer bankruptcies are filed by desperate individuals who are financially, emotionally, and physically exhausted. Sometimes lost in the discussion that the bankruptcy discharge provides a fresh start to honest but unfortunate debtors is that, perhaps as importantly, it provides a commensurate benefit to society and the economy. People are freed from emotional and financial burdens to become more energetic, healthy participants. (p. 550)

The Student Borrower Bankruptcy Relief Act of 2019 is now pending in Congress. This legislation, if adopted, will remove the "undue hardship" provision from the Bankruptcy Code and allow overburdened debtors to discharge their student loans in bankruptcy like any other nonsecured consumer debt. Supporters of this bill should cite Judge Berger's opinion in In re Engen, because it expresses one federal judge's view that the "undue hardship" provision in the Bankruptcy Code has created "a prison of emotional confinement" that burdens not only student debtors but our society as a whole.

"A prison of emotional confinement"

References

In re Engen, 561 B.R.523 (Bankr. D. Kan. 2016).