ECMC and the Department of Education are a couple of bullies: The Scott Farkus affair that never ends

Fortunately, we only see Scott Farkus once a year. He comes around every Christmas eve, when TBS runs The Christmas Story for 24 hours. Farkus, you remember, is the yellow-eyed bully that picks on Ralphie Parker and his little brother Randy. Farkus is always accompanied by his pint-sized sidekick, Grover Dill.

ECMC & DOE are real-life bullies for student debtors.

Scott Farkus, of course, is a fictional bully, but destitute student borrower are tormented by a real-life bully--Educational Credit Management Corporation. ECMC,a so-called fiduciary of the U.S Department of Education, gets well paid to hound student-loan debtors who naively try to shed their student loans in bankruptcy to get a fresh start.

Would you like some examples of ECMC's bullying behavior? Here are a few:

• ECMC opposed bankruptcy relief for Janet Roth, a woman in her 60s with chronic health problems, who was living on Social Security income of $774 a month. 

• ECMC successfully blocked Janice Stephenson, a woman in her fifties, from discharging her student loans in bankruptcy--loans that were almost 25 years old. At the time Stephenson filed for bankruptcy, she was living on about $1,000 a month and had a history of homelessness.

• Last year, a bankruptcy judge slapped ECMC with punitive damages for repeatedly garnishing the wages of Kristin Bruner-Halteman, a bankrupt student debtor who worked at Starbucks. ECMC violated the automatic stay provision more than 30 times, the bankruptcy court ruled. And how much money was at stake? Ms. Bruner-Halteman only owed about $5,000.

So Scott Farkus, in a corporate form, is alive and well in American bankruptcy courts.

And Grover Dill, Farkus's little toadie, is also alive and well. The Department of Education itself bullies student borrowers in bankruptcy, almost as cruelly as ECMC.  And here are a few examples:

• In Myhre v. Department of Education, DOE fought Bradley Myhre, an insolvent quadriplegic who tried to discharge a modest student loan in bankruptcy. DOE lost that one. The court commended Mhyre for his courage: he was working full time but he had to employ a caregiver to feed and dress him and drive him to work. 

• DOE tried unsuccessfully to persuade a Missouri  bankruptcy court to deny bankruptcy relief to Michael Abney, a single father in his 40s who was living on $1,300 a month and was so poor he rode a bicycle to work because couldn't afford a car. 

• Just a few months ago, the Eighth Circuit Bankruptcy Appellate Panel ruled against DOE, which had tried to keep Sara Fern from discharging her student debt in bankruptcy. Fern is a single mother of three children who takes home $1,500 a month from her job and supplements her income with food stamps and public rent assistance.

Have I described bullying behavior by ECMC and DOE? Of course I have. Every single time DOE or ECMC shows up in bankruptcy court, the argument is the same: "This deadbeat doesn't deserve bankruptcy relief, your honor. Put the worthless son of a b-tch in a 20- or 25-year income-based repayment plan."

In the past, bankruptcy courts were persuaded by these callous arguments, but judges are beginning to return to their duty. I predict the day is soon coming when a federal appellate court will overrule the precedents that have favored ECMC and DOE--most notably the harsh Brunner ruling that most federal circuits have adopted.

But for now, the bullying goes on.  Just like Scott Farkus and Grover Dill, ECMC and DOE lie in wait for hapless debtors who stagger into bankruptcy court. ECMC has accumulated $1 billion in unrestricted assets while engaging in this shameful behavior, and the federal government pays ECMC's legal fees. 

References

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


Bruner-Halteman v. Educational Credit Management Corporation, Case No. 12-324-HDH-13, ADV. No. 14-03041 (Bankr. N.D. Tex. 2016).

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

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

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

Roth v. Educational Management Corp., 490 B.R. 908 (9th Cir. BAP 2013).

Stevenson v. Educational Credit Management Corporation, 463 B.R. 586 (Bankr. D. Mass. 2011). aff'd, 475 B.R. 286 (D. Mass. 2012).

Sara Fern v. FedLoan Servicing: A single mother of three discharges her student loans in bankruptcy over the objections of the U.S. Department of Education

Student loans cannot be discharged in bankruptcy, right? WRONG! Distressed student borrowers have won a string of victories in the bankruptcy courts over the past few years. And Fern v. FedLoan Servicing is another case for the win column. 

Fern v. FedLoan Servicing: A single mother of three children discharges her student loans in bankruptcy

In 2016, Sarah Fern, a 35-year-old mother of three children, discharged about $27,000 in student loans in an Iowa bankruptcy court. And last February, her victory was affirmed by the Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals.

Over the years, Fern had not made a single payment on her student loans. Nevertheless, she had never been in default because her loans had always been in deferment or forbearance due to her economic circumstances.

At the time of her bankruptcy trial, Fern was raising three children on take-home pay of about $1,500 a month, which she supplemented with food stamps and public housing assistance. Fern drove an old car in need of repair, and she could not afford to buy a more reliable vehicle.

Although Fern attempted to improve her income status by taking out student loans to enroll in two postsecondary programs, neither program led to a higher paying job. As the bankruptcy court noted, Fern had never earned more than $25,000 a year.

The Department of Education opposed Fern's effort to shed her student loans in bankruptcy. DOE produced an expert witness who testified that Fern qualified for various income-based repayment plans. According to the expert, Fern's income was so low that her monthly payments would be zero if she entered one of these plans.

But Judge Thad Collins, an Iowa bankruptcy judge, rejected DOE's arguments and discharged Fern's student loans in their entirety. In Judge Collins' view, Fern would probably never be in a financial position to pay back her loans.

Under an income-based repayment plan, Judge Collins noted, Fern's monthly payments would be zero, but her debt would continue to grow as interest accrued on the unpaid balance. Although the government would forgive any unpaid portion of Fern's loans at the end of the repayment period (20 or 25 years in the future), the cancelled loan debt might be taxable to her. In addition, if Fern's student loans were not discharged, they would be a blot on her credit record.

Judge Collins recognizes emotional stress from long-term indebtedness

Judge Collins also considered the emotional distress that comes from long-term indebtedness, Fern's loans had already caused her emotional stress, Collins observed, and she would continue to suffer from emotional stress if she were forced into a long-term repayment plan:

This mounting indebtedness has also indisputably been an emotional burden on [Fern]. [She] testified that knowing that the debt is hanging over her, constantly growing, and that she will never be able to repay this debt, is distressing to her. [Fern] testified that she feels like she will never be able to get ahead because she will always have this debt.

In Judge Collins' opinion, the emotional burden of long-term indebtedness was a hardship that weighed in favor of discharging Fern's student loans, even though this burden could not be quantified. "The Court will not ignore a hardship," Collins wrote, "simply because it is not reflected on a balance sheet."

Department of Education appeals Judge Collins' decision

The Department of Education appealed Judge Collins' decision; and last February. the Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals affirmed Collins' ruling. According to DOE, Judge Collins erred by taking Fern's emotional burdens into account, by considering the tax consequences of a long-term repayment plan, and by recognizing that Fern's debt would grow over the years because her monthly payments under a long-term plan (zero), would cause interest on her loans to continue accumulating.

But the Eighth Circuit's BAP disagreed. "These additional observations identified by the Bankruptcy Court simply served to supplement its determination of undue hardship under the totality of circumstances test," the BAP court wrote.

The Fern decision is a big win for student-loan debtors. This is the latest federal appellate court decision to reject creditors' arguments that bankrupt student borrowers should be pushed into 20- or 25-year repayment plans instead of getting a fresh start. 

There is justice in the world (sometimes)

As one of Cormac McCarthy's fictional characters said in the novel, The Crossing, "Hay justicia en el mundo!"

Yes, there is justice in the world, but justice is not distributed evenly and sometimes it arrives too late to do us any good. Sara Fern was very fortunate to have obtained justice from Judge Thad Collins, who wrote a remarkably sensible and compassionate decision. And she was even more fortunate to have Judge Collins' decision affirmed on appeal by the Eighth Circuit's Bankruptcy Appellate Panel.

References

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

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016).