Showing posts with label totality of circumstances. Show all posts
Showing posts with label totality of circumstances. Show all posts

Sunday, August 5, 2018

Martin v. ECMC: Iowa bankruptcy judge discharges unemployed lawyer's student loans

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 Education540 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).

Thursday, June 21, 2018

Smith v. U.S. Department of Education: A severely stressed student-loan debtor gets bankruptcy relief and the judge questions harsh interpretation of "undue hardship"

Kirt Francisco Smith, a 39-year-old unemployed man with severe health problems, won a bankruptcy discharge of his student-loan debt--almost $50,000.

 Every student-loan debtor's victory in bankruptcy court is something to celebrate; we don't see enough of them. Smith's victory, however, is especially cheering because the judge explicitly challenged the harsh standards the federal courts are using when determining whether student-loan debt is an "undue hardship" eligible for bankruptcy discharge.

Here's Mr. Smith's story as as chronicled by Bankruptcy Judge Frank Bailey. Smith took out $29,000 in student loans to enroll in a computer drafting program at ITT Tech. He completed the program in 2008  but was unable to find a job in the computer drafting field. By the time he filed for bankruptcy his debt had grown to $50,000 due to accumulated interest and fees.

Smith suffers from major health problems. He is afflicted with intractable epilepsy, which prevents him from having a driver's license. In addition, Smith has been diagnosed with affective disorders, including anxiety and depression leading to suicidal ideation. In 2006, he was hospitalized at McLean Psychiatric Hospital; and he has not been employed since that hospitalization. He began receiving Social Security Disability payments in 2007.

During the trial, which stretched out over five days, Smith argued that he could not pay back his student loans and maintain a minimal standard of living for himself and his dependent mother.  And indeed, Smith and his mother lived on the brink of utter poverty.

Smith received $1369 a month in Social Security income and his mother received $792.26 in Social Security. The two also receive food stamps, which the judge included as income. Altogether then, Smith and his mother lived on $2265.26 a month, which is about $80 less than their expenses.

The U.S. Department of Education opposed a discharge of Smith's student loans, dragging out its usual objections. Smith never made a single payment on his loans, DOE argued, and therefor did not handle his loans in good faith. Smith did not renew his paperwork to stay in an income-based repayment plan--another sign of bad faith.  Finally, DOE objected to the modest sums Smith spent on travel and entertainment.

Fortunately for Smith, Judge Bailey rejected all DOE's arguments and discharged Smith's student loans. The judge utilized the "totality-of-circumstances" test for determining whether Smith's student loans constituted an undue hardship rather then the harsher Brunner test.

Remarkably, Judge Bailey criticized both the Brunner test and the totality-of-circumstances tests. "I pause to observe that both tests for 'undue hardship' are flawed," he wrote (p. 565). In the judge's view, "[t]hese hard-hearted tests have no place in our bankruptcy system."

Judge Bailey then went on to articulate a more reasonable standard for determining when a debtor's student loans can be discharged in bankruptcy.  "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough" (p. 565).

In particular, Judge Bailey criticized other courts' focus on the debtor's good faith.
[A]ny test that allows for the court to determine a student debtor's good or bad faith while living at a subsistence level, virtually strait-jacketed by circumstances, displaces the focus from where the statute would have it: the hardship. It also imposes on courts the virtually impossible task of evaluating good or bath faith in debtors whose range of options is exceedingly limited and includes no realistic hope of repaying their loans to any appreciable extent.. (p. 566)
What an astonishing decision! To my knowledge, Judge Bailey is the first bankruptcy judge to explicitly attack both the Brunner test and the totality-of-circumstances test. (Judge Jim Pappas criticized the Brunner test in Roth v. ECMC.) Just think how many suffering student-loan debtors would qualify for bankruptcy relief if every judge reasoned like Judge Bailey.

Brenda Butler,  for example, who handled her student loans in good faith only to see her loan balance double over a 20 year period, would have obtained relief if Judge Bailey had been her judge. Ronald Joe Johnson, a bankrupt student-loan debtor who made $24,000 a year by working two jobs, would be free of his student loans if he had appeared in Judge Bailey's court instead of a bankrkuptcy court in Alabama. Janice Stevenson, a woman in her mid-fifties who had a record of homelessness and who lived in rent-subsidized housing and had an income of less than $1,000 a month, would have won a bankruptcy discharge of more than $100,000 in student debt if only Judge Bailey's standard had been applied rather than the harsh rule applied by Judge Joan Feeney.

Today, Judge Bailey's decision in the Smith case is just a straw in the wind, but the day will come when bankruptcy courts will apply his standard universally. After all, as some wise person observed, if a debt cannot be paid back, it won't be.  Right now, about 20 million people are unable to pay back their student loans.  Almost all of them are entitled to bankruptcy relief under the rule articulated by Judge Frankk Bailey.

References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Johnson v. U.S. Department of Education, 541 B.R. 750 (N.D. Ala. 2015).

Roth v. Educational Credit Management Corporation490 B.R. 908 (9th Cir. B.A.P. 2013). 

Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).

Stevenson v. ECMC, Case No. 08-14084-JNF, Adv. P. No. 08-1245 (Bankr. D. Mass. August 2, 2011)