Showing posts with label minimal standard of living. Show all posts
Showing posts with label minimal standard of living. Show all posts

Saturday, April 25, 2020

Laurina Bukovics v. ECMC: An Illinois woman took out $20,000 in student loans, paid back $29,000 and still owed $80,000

Laurina Kim Bukovics enrolled as a freshman at the University of Wisconsin in 1985 and graduated five years later. She took out about $20,000 in student loans to finance her studies. Over the years, she paid back $29,000--almost 140 percent of the principle. 

Nevertheless, 25 years after she graduated, Bukovics owed $80,000 on her student loans--four times what she borrowed.  Even though she had made 99 loan payments between 1999 and 2015—equivalent to more than eight years of twelve monthly payments-- her college-loan debt had quadrupled due to accumulating interest.

In 2015, Bukovics sought bankruptcy relief. Two years later, she filed an adversary proceeding to discharge her student loans. In 2018, while her adversary proceeding was pending, Bukovics lost her job.

Educational Credit Management Corporation, the federal government's ever-diligent debt collector, opposed a discharge of Bukovics's student-loan debt. ECMC argued that Bukovics could not meet the "undue hardship" test because she had not tried to maximize her income and not lived frugally.

In particular, ECMC accused Bukovics of spending too much money on food and not being diligent enough in looking for work.  Her job search was too narrow, ECMC claimed. 

In deciding Ms. Bukovics's case, Bankruptcy Judge Jack Schmetterer applied the three-part Brunner test to determine whether Bukovics could repay her student loans while still maintaining a minimal standard of living.  After conducting an extensive analysis of Bukovics's financial history, Judge Schmetterer ruled in her favor.

Clearly, Judge Schmetterer concluded, Bukovics could not maintain a minimal standard of living if she were forced to repay her student loans. After all, Bukovics was unemployed, temporarily living rent-free with a friend, receiving government nutritional assistance (food stamps), and getting her health care through Medicaid.

"Put simply, Judge Schmetterer wrote, given Bukovics's "frugal lifestyle and overall significant budget shortfalls, including the lack of money to provide for even basic needs, she would be unable to maintain a minimal standard of living if required to repay her student loan" (Bukovics v. ECMC, p. 189).

Judge Schmetterer rejected ECMC's arguments that Bukovics had spent too much money on food. On the contrary, he commented, spending $360 for sustenance over two to three months was not excessive.

In any event, Judge Schmetterer observed, ECMC's position "misses the point" (p.188). In the judge's opinion, ECMC was inappropriately looking for pennies that Bukovics might save when it was evident that her income was inadequate to meet her basic human needs.

Judge Schmetterer also rejected ECMC's claim that Bukovics had not looked hard enough for a job.  The judge pointed out that she had applied for over 200 positions over sixteen months and that several applications had led to job interviews (p. 187). Although the judge acknowledged that Bukovics voluntarily gave up her last job, she had testified that she had been pressured to quit and that her position had been eliminated after she terminated her employment.

Implications of the Bukovics decision

The Bukovics opinion is remarkable not so much because Laurina Bukovics won her case but for the fact that ECMC, the Department of Education's designated representative, would oppose her.

Ms. Bukovics borrowed $20,000 to obtain a bachelor's degree from a well-respected public university. She repaid $29,000 by making almost 100 monthly payments. Although financial circumstances forced her to skip monthly payments from time to time, the Department of Education acknowledged her hardship by granting her 10 deferments or forbearances.

Thirty years after graduating, Bukovics had reduced her debt by one dime. In fact, she owed four times what she borrowed. She was in her early fifties and out of a job.

What reasonable person would argue that Laurina Bukovics should not be freed of debt she can never repay?  And yet ECMC, representing the United States government, made that argument.

Today, the American economy is crippled by the coronavirus pandemic, and the nation's unemployment rate is 15 percent. Millions of people are living in circumstances similar to those of Ms. Bukovics.  Surely we need a more compassionate and efficient way of freeing destitute Americans from unmanageable debt than applying the outdated and callous Brunner test that examines how much an unemployed person spends on food.

References

Bukovics v. Educational Credit Management Corporation, 612 B.R. 174 (Bankr. N.D. 2020).

Judge Jack Schmetterer: ECMC missed the point


Wednesday, March 4, 2020

Clavell v. U.S. Department of Education: A New York bankruptcy judge takes refreshing approach to "undue hardship" in student-loan bankruptcy case

Clavell v. U.S. Department of Education: An Introduction

Christian Clavell, a 35-year-old sales employee with Coca-Cola, filed for bankruptcy in the hope of discharging $96,000 in student loans.  The U.S. Department of Education opposed his application for relief, arguing that Clavell could afford to make loan payments of $492 a month under REPAYE, one of DOE's long-term, income-based repayment plans.

At first blush, DOE's position seems reasonable. Clavell was projected to have an income of $77,000 a year, he was single, and he lived inexpensively in his grandfather's home. Fortunately for Clavell, however, Judge Michael E. Wiles, dug deeper into Clavell's financial situation and concluded that he was entitled to a partial discharge of his student loans that only requires him to make loan payments of $250 a month over a 25-year term.

In reaching his decision, Judge Wiles endorsed the views expressed by Bankruptcy Judge Cecelia G. Morris in Roseberg v. New York State Higher Education Services Corporation.  Like Judge Morris, Judge Wiles rejected the "certainty of hopeless" standard that some bankruptcy judges have adopted to justify their decisions to deny relief to distressed student-loan borrowers.

And, like Judge Morris, Judge Wiles called for a less harsh interpretation of the Second Circuit's Brunner opinion. Brunner has been used by bankruptcy judges all over the country to make it virtually impossible for honest but unfortunate student-loan debtors to obtain the "fresh start" that the bankruptcy courts were established to provide. Together, Rosenberg and Clavell signal the possibility that bankruptcy judges would like to see the Brunner test softened by the federal appellate courts.

Judge Wiles applies the three-part Brunner test to Mr. Clavell's financial situation.

In analyzing Clavell's claim, Judge Wiles applied the three-part Brunner test, first articulated by the Second Circuit Court of Appeals.  Part one of that test required Clavell to show that he could not pay off his student loans and still maintain a minimal standard of living.

Judge Wiles pointed out that Clavell made child-support payments of $946 a month and that DOE did not take this obligation into consideration when it calculated how much Clavell would have to pay under the REPAYE plan. In Judge Wiles' view, DOE's calculations were "too mechanical" and did not take into account Clavell's actual financial circumstances" (p. 10).

Furthermore, the judge noted, REPAYE is actually a misnomer. "[T]he mere fact that the REPAYE payments are low, or in some cases even zero, does not really mean that a debtor can afford to 'repay' the underlining loans" (p. 11). On the contrary, the fact that some people are eligible to make lower payments on their student debts under REPAYE may actually show that these people cannot afford to repay their underlying loans.

Looking at Clavell's expenses, Judge Wiles subtracted Clavell's child-support payments to determine his take-home pay--only $3,242 a month. The judge concluded that Clavel's modest contributions to his retirement plan ($121 a month) were reasonable expenses and not a "luxury" item as DOE maintained.
I disagree with the DOE's contention that modest 401(k) contributions of the kind at issue here are "luxury" items. One of the financial obligations of a responsible adult is to make reasonable provisions for the future, both for the adult's own good and for the good of his or her family.  (p. 20)
Indeed, Judge Wiles reasoned, "[r]equiring a debtor to forego making reasonable provisions for his and his family's future living expenses would itself be an 'undue hardship,' even if it would not immediately deprive the debtor of food or shelter" (p. 20).

At the time of trial, Clavell lived with his grandfather, paying him $956 per month in rent. DOE argued that Clavell's "real" rent obligations were less than $956, apparently because Clavell paid rent to a relative. But Judge Wiles rejected DOE's argument, finding that Clavell's rent obligations were reasonable.

Remarkably, Judge Wiles also determined that Clavell's own estimation of his food and housekeeping costs were higher than Clavell himself claimed.  Reasonable costs for these items was not $265 a month, as DOE contended, or even $400 a month, as Clavell asserted. Instead, Clavell's reasonable housekeeping costs were $590.

In sum, taking all of Clavell's reasonable expenses into account, the judge concluded that Clavell could not maintain a minimal standard of living if forced to repay his student loans.

Turning to part two of the Brunner test, Judge Wiles ruled that Clavell had met his burden of showing that his financial circumstances were not likely to change over "a substantial portion of the loan repayment period" (p. 36). Although Clavell might make more money if he obtained a job in his chosen field of law enforcement, Clavell had not been able to get such a job, and the judge found no evidence to suggest that Clavell had not made a good-faith effort to maximize his income.

Finally, Judge Wiles concluded that Clavell had handled his student-loan obligations in good faith, and thus, he met part three of the Brunner test.  The judge acknowledged that Clavell had made no payments on his student loans since he consolidated them in 2013. Nevertheless, Judge Wiles reasoned, "a debtor's 'good faith' must be determined based on the situation in which the debtor found himself."

In Clavell's case, Judge Wiles observed:
[T]he loan servicers themselves recognized that Mr. Clavell's circumstances did not permit him to make payments and thus they suspended Mr.Clavell's payment obligations and put the loans in forbearance as a result. In fact, Mr. Clavell never defaulted on his student loans. Instead, his payment obligations have been suspended. Mr. Clavell's failure to make payments was hardly a sign of "bad faith" when the lender acknowledged that Mr. Clavelll could not make such payments and when the lender agreed to suspend his obligation to make them. (p. 37)
Good faith, Judge Wiles ruled, should be measured by a debtor's efforts to obtain employment, maximize his income, minimize expenses, and undertake all other reasonable efforts to repay his student' loans.
The evidence shows that Mr. Clavell did his best to maximize his employment opportunities and his income and to minimize his expenses. He attempted to find a position in law enforcement but was unable to do so despite diligent efforts. He has worked in a sales position and . . . there is no suggestion that he passed up any better opportunities that were available. He has a large child support obligation that he must honor and other reasonable expenses that do not permit him both to maintain a minimal standard of lving and to repay his loans. (p. 37).
Accordingly, Judge Wiles reduced the amount of Clavell's loan balance such that Clavell would pay off the remaining debt in an amount that could be paid in 25 years with monthly payments set at $250 per month.

 Conclusion

Clavell v. U.S. Department of Education is important for several reasons:

First, Judge Wiles endorsed the view of Judge Cecelia G. Morris in the Rosenberg decision that the Brunner test has been interpreted too harshly by many bankruptcy judges. Judge Wiles flatly rejected the "certainty of hopelessness test" that some bankruptcy courts have adopted to justify their decisions to deny overburdened debtors relief from their student-loan debts.

Second, Judge Wiles ruled that a student debtor's child-support payments should be taken into account when determining whether the debtor can maintain a minimal standard of living and still pay off student loans. Judge Wiles also ruled that a student-loan debtor is entitled to make modest contributions to his or her retirement plan and that such payments are not a luxury.

Finally, and perhaps most importantly, Judge Wiles ruled in Clavell's favor regarding the fact that Clavell had not made monthly loan payments while his loans were in forbearance.  The judge concluded that DOE's decision to grant Clavell a forbearance from making payments constituted evidence that DOE itself acknowledged that Clavell was unable to repay his student loans while maintaining a minimal standard of living.

References

Clavell v. U.S. Department of Education, No. 15-12343, Adv. Pro. No. 16-01181 (Bankr. S.D.N.Y. Feb. 7, 2020).

Rosenberg v. New York State Higher Education Services Corporation, 18-35379, 2020 LEXIS 73 (Bankr. S.D.N.Y. Jan. 7, 2020).

Bankruptcy Judge Michael E. Wiles