Showing posts with label good faith. Show all posts
Showing posts with label good faith. Show all posts

Wednesday, January 20, 2021

Immigrant obtains medical degree, can't find MD job. Bankruptcy judge discharges $400,000 in student-loan debt

Seth Koeut was born in Cambodia and came to the United States as a child. Like many immigrants, he applied himself energetically to obtain a better life. He graduated 6th in his high school class and went on to earn two bachelor's degrees from Duke University.

Mr. Koeut then went to medical school and received an MD from Ponce School of Medicine in Puerto Rico. Somewhere along the way, he learned to speak English, Cambodian, Spanish, French, and Italian.

Although he passed his Medical Board exams, Koeut could not obtain a residency, which is a prerequisite to obtaining a medical license. After applying for residencies for five years, he gave up hope of becoming a licensed physician in the United States.

Over the years, Koeut held various jobs, including sales clerk at Banana Republic, a dishwasher at a Mexican restaurant, and parking lot signaler.

Finally, Koeut filed for bankruptcy and asked Bankruptcy Juge Margaret Mann to discharge his student-loan debt, which totaled $440,000. A vocational evaluation expert assessed Koeut's job prospects and said Koeut would need additional training to meet his employment potential.

The U.S. Department of Education (DOE) opposed Koeut's application for a student-loan discharge and argued that he should be put in a long-term, income-based repayment plan (IBR). DOE also said Koeut failed to reach his employment potential because of a lack of initiative.

But Judge Mann disagreed. "A medical school graduate who works as a parking attendant and dishwasher cannot be described as lazy," she observed. She approved of Koeut's decision not to sign up for an IBR, which he rejected "because he could not carry the burden of his student debt without harming his opportunities for advancement."

In the end, Judge Mann discharged almost all of Koeut's student debt, finding that his current income and expenses did not permit him to maintain a minimum standard of living--even without making loan payments.

The Koeut case may be a sign that the bankruptcy judges are weary of DOE's incessant demands to put distressed student-loan debtors into IBRs. And perhaps they have grown tired of DOE's insistence that every bankrupt debtor's financial distress is entirely the debtor's fault.

Indeed, one cannot read Judge Mann's opinion without concluding that Seth Koeut had done everything possible to improve his standard of living and had handled his massive student-loan debt in good faith. Let us hope for more bankruptcy court decisions like Koeut v. U.S. Department of Education.


References

Koeut v. U.S. Department of Education, 622 B.R. 72 (Bankr. S.D. Cal. 2020).




Tuesday, August 27, 2019

A disbarred lawyer is unable to discharge $250,000 in student loans in bankruptcy. Will he ever pay back those loans?

Paul Hurley obtained a law degree in 2004 and a master's degree in tax law in 2006. He took out student loans to fund his studies, and he was never in default on those loans.

About three years after getting his master's degree, Hurley took a job as a revenue agent for the Internal Revenue Service, which required him to audit taxpayers' federal tax returns. According to court documents, Hurley solicited a $20,000 bribe from a taxpayer in 2015, and he was convicted of two felonies: Receiving a bribe by a public official and receiving a gratuity by a public official. He was sentenced to 30 months in prison, and he lost his license to practice law in the state of Washington (601 B.R. at 532).

While still incarcerated, Hurley filed for bankruptcy and sought to discharge $256,000 in student loans. He was 45 years old at the time and had a three-year-old son. Hurley argued that it would be an undue hardship for him to pay back his student loans, given the fact that he could no longer practice law.

A bankruptcy court in the state of Washington denied Hurley's petition to discharge his student loans. In the court's opinion, Hurley failed the three-part Brunner test for determining whether repayment of his loans would constitute an undue hardship. 

In particular, the court ruled that Hurley failed the good faith prong of the Brunner test. In the court's view, Hurley's criminal conduct was "very significant' and outweighed his earlier, good-faith efforts to repay his student loans.

“As a lawyer,” the bankruptcy judge reasoned, “[Hurley] had to know that, if he committed the crime that he did, he would lose his ability to practice law. As such [Hurley] suffers from both failure to maximize his income and having willfully or negligently caused his financial condition” (601 B.R. at 533, appellate court quoting the bankruptcy court).

Hurley appealed the bankruptcy court’s decision to the Ninth Circuit Bankruptcy Appellate Panel, which affirmed the lower court’s opinion. The BAP court emphasized that it was not endorsing a bright-line rule that a criminal conviction always nullifies good faith. Nevertheless, the appellate court agreed with the bankruptcy judge that Hurley’s “willful criminal behavior tipped the balance against good faith”(601 B.R. at 536).

In addition, the BAP court agreed with the lower court that Hurley failed to maximize his income, which is a requirement for obtaining a student-loan discharge. Hurley maintained that he could not maximize his income because he lost his law license, but the BAP court pointed out that he lost his license “because of his willful conduct.”

Paul Hurley is not the most sympathetic person to seek student-loan relief in a bankruptcy court.  The BAP court and the bankruptcy court are clearly correct in concluding that Hurley’s financial predicament is the result of his own misbehavior.

But what did the BAP court accomplish when it ruled against Mr. Hurley? Will Hurley ever pay back the quarter of a million dollars he owes in student loans? No—I don’t think he will.

Hurley’s only hope now is to apply for an income-based repayment plan that will set his monthly loan payments based on his income. Such a plan will terminate in 20 or 25 years—when Hurley will be in his sixties. It seems virtually certain that his loan balance will keep growing with each passing month because interest will continue to accrue on his debt even if he makes his regular monthly loan payments.

Senator Bernie Sanders proposes student-loan forgiveness for everybodyeven Mr. Hurley. That may be going a bit far.

But people who are insolvent and unable to repay their student loans should be able to discharge those loans in bankruptcy like any other unsecured debt--even people who've made mistakes.

After all, what is the point of saddling Mr. Hurley with crushing student-loan debt he will never repay?




References

Hurley v. United States, 601 B.R. 529 (B.A.P. 9th Cir. 2019).