Lone Star Blues: Vera Thomas is 60 years old and suffers from diabetic neuropathy, but she lost her bid to discharge student loans in bankruptcy

Vera Thomas is more than 60 years old and suffers from diabetic neuropathy, "a degenerative condition that causes pain in her lower extremities." Unemployed and suffering from a chronic illness, she filed for bankruptcy in 2017 in the hope that she could discharge her student loans in bankruptcy. 

 At the time of her bankruptcy proceedings, Thomas was living in dire poverty. Her monthly income was less than $200 a month and she was surviving on "a combination of public assistance and private charity." 

How much did Ms. Thomas owe on her student loans? She borrowed $7,000 back in 2012 and she used her loan money to attend community college for two semesters. Thomas didn't return for a third semester, and she only paid loan payments totally less than $85. 

Judge Harlin Hale, aTexas bankruptcy judge, applied the three-part Brunner test to determine whether Thomas would suffer an "undue hardship" if forced to pay off her student loans. Part one required her to show that she could not pay back her student loans and maintain a minimal standard of living. Thomas clearly met this part of the test.

Brunner's second part required Thomas to establish that circumstances beyond her control made it unlikely that she would ever be able to repay her student loans. The U.S. Department of Education argued that Thomas could not meet this part of the Brunner test and Judge Hale agreed. In spite of her debilitating illness,  he concluded, Thomas could not show that she was "completely incapable of employment now or in the future." Surely there was some sedentary work she was capable of doing, Judge Hale reasoned.

In short, Judge Hale denied Thomas's request for bankruptcy relief from her student loans. He expressed sympathy for Ms. Thomas's situation, but he said that during his entire time on the bench, he had never granted student-loan bankruptcy relief over the objection of the lender (the U.S. Department of Education or its contracted debt collectors).

Thomas appealed to a U.S. District Court, which affirmed Judge Hale's decision; and then she appealed to the Fifth Circuit Court of Appeals. Two public interest groups came to her aid by filing an amicus brief. The National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys argued that the Brunner test was no longer an appropriate standard for determining whether a student-loan debtor is entitled to bankruptcy relief and should be overruled. 

But the Fifth Circuit refused to abandon the Brunner test or even to soften the way it is interpreted.  Unless the Supreme Court or an en banc panel of the Fifth Circuit overrules Brunner, the Fifth Circuit panel stated, it was bound by that decision.

The Fifth Circuit decision  implicitly acknowledged that the federal student-loan program poses an enormous public-policy problem, but in the court’s view, it was not the judiciary’s job to fix it: "[T]he fact that student loans are now mountainous in quantity poses systematic issues far beyond the capacity or authority of courts, which can only interpret the written law. . . Ultimate policy issues raised by Ms. Thomas and the amicus are for Congress, not the courts."

So what does the future hold for Vera Thomas? Her student-loan debt is undoubtedly far larger today than it was when she initially borrowed $7,000 to enroll at a community college back in 2012. Over the years, interest has accrued and perhaps penalties and fees. In the aftermath of the Fifth Circuit's decision, it seems likely that Vera Thomas’s only viable option is to sign up for an income-driven repayment plan, which will terminate when she is 85 years old. 

References

Thomas v. U.S. Department of Education, No 18-11091 (5th Cir. July 30, 2019).

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).

Hill v. ECMC: An Army veteran with PTSD sheds her student loans in bankruptcy

Hill v. ECMC: A veteran seeks to discharge her student loans in bankruptcy

Risa Rozella Hill enrolled at Wichita State University after getting out of the Army, and she obtained a bachelor's degree in social work in 2002. She went on to pursue a master's degree from Newman College but did not graduate. In 2008, she received an MBA from DeVry University.

Hill financed her studies with 23 student loans totally $127,000. She never paid anything on these loans, but she was never in default because she obtained various deferments or forbearances that entitled her to skip her loan payments.

In 2013, Hill began to experience symptoms of psychosis, including delusions, hallucinations, and voices that "instructed her to behave in certain ways." In 2014, she was involuntarily committed to psychiatric care in a Georgia hospital. She was diagnosed with bipolar disorder and post-traumatic stress disorder (PTSD).

Hill was released from the hospital, but she was readmitted to another hospital a few months later after showing signs of psychosis. She was released again in November 2014.

Prior to filing for bankruptcy, Hill experienced periods of homelessness. The Social Security Administration deemed her disabled and she began receiving disability-benefit checks--her sole source of income. She also began living in publicly subsidized housing.

In 2017, Hill filed for bankruptcy and sought to have her student loans discharged. Hill was represented by the Atlanta Legal Aid Society. Educational Credit Management entered the litigation as the sole defendant.

Judge Sage Sigler discharges Hill's student loans over ECMC's objections

In evaluating Hill's claim, Judge Sage Sigler applied the three-pronged Brunner test to determine whether repaying the loans would constitute an "undue hardship" under 11 U.S.C. § 523 of the Bankruptcy Code. In Judge Sigler's opinion, Hill's disability income was hardly adequate to meet her basic needs.  Hill could not maintain a minimal lifestyle if she were forced to pay back her student loans, Judge Sigler concluded; and thus, Hill satisfied the first prong of the Brunner test.

Moreover, Judge Sigler continued, Hill's financial circumstances were unlikely to improve during the loan repayment period. "[T]he weight of the evidence demonstrates that [Hill's] condition will persist indefinitely," Judge Sigler observed; and any recovery from Hill's bipolar disorder was "purely speculative." Indeed, Judge Sigler wrote, "The prospect of [Hill] obtaining and maintaining employment commensurate with her prior jobs is unfortunately hopeless." In short, Hill met part two of the Brunner test.

Part Three of the Brunner test required Hill to show that she had handled her student loans in good faith.  Again, Judge Sigler ruled in Hill's favor. Hill met the good faith standard in spite of the fact she had not made a single loan payment.

Judge Sigler pointed out that Hill took the steps necessary to obtain deferments or forbearances, which the judge evidently viewed as a sign of good faith. Moreover, the judge noted, "Good faith effort only requires the debtor to have made payments when she was in a position to make such payments. [Hill] was never in such a position."

Implications

In some ways, the Hill decision is unremarkable. Hill's mental illness (psychosis and PTSD) clearly qualified her for a student-loan discharge. What is remarkable is the fact that ECMC opposed it. ECMC dragged out its shopworn tactic of demanding that Hill sign up for REPAYE, a long-term income-based repayment plan--a plan that would have required her to make monthly payments of zero dollars due to her low income.

But Judge Sigler did not buy that line. ECMC's calculation of Hill's loan payments under REPAYE demonstrated that Hill had no discretionary income to dedicate to student-loan repayment. "The very reason [Hill's] payment amount would be zero-dollars a month under REPAYE is because she cannot afford to make payments under her student loans and maintain a minimal standard of living."

The Hill case is probably most significant as another case in which a bankruptcy judge refused to adopt ECMC's tiresome argument that all student-loan debtors should be placed in income-based repayment plans as an alternative to bankruptcy relief.  Judge Sigler identified the fundamental flaw in ECMC's argument, which is this: Debtors so destitute that they are required to make zero-dollar payments on their student loans clearly meet the first criterion for student-loan relief under Brunner. They cannot maintain a minimal lifestyle and pay off their student loans.

Congressman John Katko introduces bill to make student loans dischargeable in bankruptcy. Will presidential candidates endorse the bill?

Last month, John Katko, a Republican congressman from New York, filed H.R. 770, a bill that would make student loans dischargeable in bankruptcy like any other consumer debt.

Titled the "Discharge Student Loans in Bankruptcy Act," Katko's bill is quite simple. It merely strikes the "undue hardship" clause from Section 523(a) of the Bankruptcy Code.

Congressman Katko filed the same bill two years ago. When he filed the bill in 2017, it had ten co-sponsors, including Maryland Congressman John Delaney. When Katko refiled the bill last month, he only had two co-sponsors.

If H.R. 770 becomes law, millions of Americans who are overwhelmed by student loans will get relief in the bankruptcy courts. They will have an opportunity to start families and buy homes. They will get the fresh start that bankruptcy is intended to provide.

Let's make Katko's bill the litmus test for everyone who is running for president or is thinking about running. Let's ask them one simple question: Do you support Katko's bill or not?

• President Donald Trump, do you support H.R. 770?
• Senator Elizabeth Warren, do you support Katko's bill?
• Senator Kamala Harris, do you support H.R. 770?
• Senator Bernie Sanders, do you support Katko's bill?
• Former Vice President Joe Biden, do you support H.R. 770?
• Senator Kirsten Gillibrand, do you support Katko's bill?
• Senator Amy Klobuchar, do you support H.R. 770?
• Michael Bloomberg, do you support Katko's bill?
• Beto O'Rourke, do you support H.R. 770?
• John Delaney, former Maryland congressman who co-sponsored Katko's bankruptcy-relief bill in 2017, you are now running for president. Do you support Congressman Katko's bill?

Our federal legislators are fond of holding committee hearings where they bully witnesses by demanding yes-or-no answers to all their hectoring questions.

Well, here is a question to everyone who wants to be president, and we should demand a yes-or-no answer. Unless a presidential candidate can say "Yes, I support H.R. 770 without qualification," that person is nothing more than a windbag who doesn't care about average Americans and does not deserve our vote.

*****

Note: I am grateful to Phil Uhrich for calling this bill to my attention.  Mr. Uhrich wrote a provocative essay on national politics in 2016 that is still timely.

Representative John Katko (R-NY)

Kinney v. National Collegiate Master Student Loan Trust: Iowa bankruptcy judge discharges student loans that a man cosigned for his niece

Anthony Kinney, a 52-year-old working guy with a modest job in the plastic industry, co-signed three student loans for his niece. His niece defaulted, and National Collegiate Master Student Trust I (probably an investment fund) began efforts to collect on two of the loans from Kinney.

Kinney filed for bankruptcy to discharge the loans, and he made two arguments. First, he argued that the Bankruptcy Code's "undue hardship" rule didn't apply to him because he only cosigned the loans and received no benefit from them. Second, Kinney maintained that paying back his niece's loans would be an undue hardship.

Bankruptcy Judge Thad Collins declined to rule on Kinney's first argument, but he agreed with Kinney that repaying the loans would be an undue hardship. In ruling for Kinney, Judge Collins interpreted "undue hardship" under the "totality of circumstances" standard, which is the standard used in the Eighth Circuit.

Judge Collins noted that Kinney made about $37,000 a year and was never likely to make more than $40,000. Moreover, Kinney had no financial resources other than his job, and his 401K retirement account only contained about $3,000.

Judge Collins also examined Kinney's living expenses, which he found to be reasonable and necessary. Kinney's resources were adequate to maintain a modest living standard, the Judge determined, but not enough to maintain a minimal standard of living if forced to pay his niece's student loans, which were accruing interest at  more than 12 percent. In addition, Kinney was living with an aunt and uncle while he went through bankruptcy, but this was a short-term solution to his housing needs. Kinney's future housing costs were definitely headed upward.

Judge Collins concluded his brief opinion by observing that Kinney was "in a very precarious financial situation," with no savings and minimal retirement funds. Having found that Kinney had no capacity to make loan payments, the Judge ruled that "requiring [Kinney] to repay either of the two loans . . . would result in undue hardship."

Judge Collins ended his opinion with a brief comment about the fact that Kinney was a cosigner of his niece's student loans. Although Kinney's cosigner status was legally insignificant to the Judge's undue hardship determination, Judge Collins found it relevant that Kinney received no educational benefit from his niece's student loans. In the Judge Collins' opinion, the lack of educational benefit weighed against Kinney's creditor.

Why is the Kinney case important? Two reasons:

First, the case illustrates the terrible consequences that people can face when they cosign a relative's student loans. The original lender probably didn't care whether Kinney's niece could pay back her loans because it knew that Kinney was also on the hook.

Second, Judge Collin's succinct decision went to the heart of the matter concerning student-loan debt. It was quite clear that Kinney would never be able to pay back his niece's student loans, which were accruing interest at 12 percent and which had nearly doubled in size since she originally borrowed the money.

Isn't ability to repay a student loan the only reasonable consideration when an overwhelmed student-loan debtor files for bankruptcy? And when it is clear that a college-loan borrower cannot repay his or her student loans, why not give that borrower the fresh start the bankruptcy courts were established to provide?

Thank God for bankruptcy judges like Judge Thad Collins. We need more judges like him.

Don't cosign a student loan!

References

Kinney v. National Collegiate Master Student Loan Trust I, 593 B.R. 618 (Bankr. N.D. Iowa 20180.

Sue Reagan v. Educational Credit Management Corporation: "A camel whose back is already broken"

Sue Reagan is 60-years old and lives in a mobile home on rented land. She has a part-time job but lives near or below the poverty line. She took out student loans to obtain a bachelor's degree in administration of justice and a master's degree in criminology, but that was long ago.

Unable to pay back her student loans under a standard ten-year repayment plan, Reagan signed up for an income-based repayment plan (IBRP). Her income is so low, however--$1,286 a month--that her monthly payments are zero dollars.

Reagan filed for bankruptcy and brought an adversary action to discharge her student loans. She argued that her student loans constituted an undue hardship and that she could not maintain a minimal standard of living and pay back those loans.

Educational Credit Management Corporation, her creditor, filed a motion for summary judgment and asked the bankruptcy court to dismiss Reagan's case without a trial.  ECMC argued that since Reagan's monthly payments were zero dollars, she could not reasonably argue that her student loans constituted an undue hardship or that her loans forced her below a minimal standard of living.

But Bankruptcy Judge Gregory Taddonio disagreed with ECMC and refused to dismiss Reagan's case. In Judge Taddonio's view, it did not matter which debt drove Reagan to the edge of poverty. "If she finds herself financially underwater, the question of which obligation pushed her below the surface matters little. To a camel whose back is already broken, any straw in his pack is unwelcome."

Judge Taddonio looked at Reagan's financial information and noted that her expenses were $119 more than her income, which was less than $1,300 a month. Moreover, her expenses were reasonable--mostly going for basic necessities. Judge Taddonio said he could not identify any expenses that could be trimmed.

So Judge Taddonio allowed Sue Reagan's adversary proceeding to go forward. Will she ultimately prevail?

Who knows? ECMC's motion to dismiss was merely the first of many arguments ECMC will make to defeat Reagan's attempt to shed her student loans. And ECMC has unlimited resources. It can hound Reagan for years right up to the Third Circuit Court of Appeals.

But Reagan's initial victory is heartening, a sign perhaps that the federal bankruptcy judges have begun to acknowledge that the federal student loan program has destroyed the lives of millions of people, most of whom deserve bankruptcy relief.

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 Education, 540 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).

Schatz v. U.S. Department of Education: A 64-year-old student-loan debtor is denied bankruptcy relief because she has equity in her home

Audrey Eve Schatz, a 64-year-old single woman, attempted to discharge $110,000 in student-loans through bankruptcy, but Judge Elizabeth Katz, a Massachusetts bankruptcy judge, refused to give Ms. Schatz a discharge. Why?  Because Schatz had enough equity in her home to pay off all her student loans.

This is Ms. Schatz's sad story as laid out in Judge Katz's opinion.

Schatz graduated from the University of Massachusetts in 1977 with a bachelor's degree in psychology. Over the years, she held a variety of low-skill jobs: repairing used clothing, selling items at flea markets, working part-time for a school district, etc.  As Judge Katz acknowledged, none of these jobs were lucrative; and more than 25 years after completing her bachelor's degree, Schatz decided to go to law school.

Schatz studied law at Western New England College School of Law, a bottom-tier law school; and she took out student loans to finance her studies. She graduated with a J.D. degree in 2009, but she failed to find a high-paying job. According to the court, Schatz's net income after graduating from law school never exceeded $15,000.

The U.S. Department opposed Schatz's petition for relief on three grounds:

First, DOE argued that Schatz had not "maximized her skills to increase her earning potential." And in fact, Schatz worked as a volunteer at the Berkshire Center for Justice, a legal aid center she had founded while in law school. But Schatz explained she was working as a volunteer to gain experience as a lawyer while she looked for a paying job; and it seems unlikely she would have worked for free if she had been offered a good attorney's job.

Second, DOE argued that Schatz had not substantiated her claim that health issues hindered her job prospects. DOE said she should have called a medical doctor to testify about her health.

Finally, DOE pointed out that Schatz had equity in her home--enough equity, in fact, to completely pay off her six-figure student-loan debt.

Judge Katz  found DOE's last argument persuasive. By the judge's calculation, Schatz had at least $125,000 of equity in her home, more than enough to cover her student-loan debt.  According to Judge Katz, Schatz could sell her home, pay off her student loans, and still be able to maintain "a minimal standard of living." In Judge Katz's view, the burden was on Schatz to produce evidence that the home she lived in was necessary to maintain "a minimal standard of living," and that no alternative housing was available at a price similar to her current mortgage payment.

Given the facts of Audrey Schatz's financial circumstances, which Judge Katz verified in her opinion, I found the judge's decision to be shockingly callous.  Schatz is 64 years old--near the end of her working life. As Judge Katz noted in her opinion, Schatz had never made more than a modest wage even after she graduated from law school.

Moreover, Schatz testified at trial that she expected to get a Social Security check of less than $900 a month and that her retirement account contained only $1,800. And Judge Katz wants Ms. Schatz to sell her house!

The Schatz case illustrates just how much depends on the personal qualities of the bankruptcy judge who hears student-loan bankruptcy cases. Remember Judge Frank Bailey, another Massachusetts bankruptcy judge who decided a student-loan case earlier this year?

Judge Bailey expressed frustration with the traditional tests bankruptcy judges are using in student-loan cases: the Brunner test and the "totality-of-circumstances" test. "I pause to observe that both tests for 'undue hardship' are flawed," he wrote. In Judge Bailey'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 should 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."

Unfortunately for Audrey Schatz, her bankruptcy case was assigned to Judge Elizabeth Katz and not Judge Frank Bailey. Had Judge Bailey been her judge, Ms. Schatz might have discharged her six-figure student-loan debt and kept her house. Surely this would have been some comfort to her when she enters old age and begins living on a Social Security check of $856.

References

Schatz v. U.S. Department of Education, 584 B.R. 1 (Bankr. D. Mass. 2018).

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

Mock v. National Collegiate Student Loan Trust: A peek into the shady world of the private student-loan market

In 2007, Casondra Mock, a Texas resident, borrowed about $20,000 from Union Federal Savings Bank, a Rhode Island institution, to finance her studies at the University of Houston at Clear Lake.  The interest rate was high--almost 14 percent.

Under the terms of the loan, Mock would begin paying  $339 a month beginning in December 2009 and would continue making monthly payments for 20 years.  Had she completed all the payments, she would have paid $81,000--4 times what she borrowed.

The Rhode Island bank packaged Mock's loan into a pool of loans, and sold the pool to National Collegiate Funding, which then sold the pool to a "purchaser trust."  Private student loans that are pooled and sold in this way are sometimes called SLABS--Student Loan Asset Backed Securities.

SLABS are very similar to the home mortgages that were pooled and sold to investors ten years ago. Those pooled mortgages were called ABS--Asset Backed Securities. If you watched the movie The Big Short, you know these ABS were sold to investors as AAA rated securities but in fact contained a lot of nonperforming home loans and were actually junk.  When the homes securing these mortgages began going into foreclosure, the ABS became almost worthless, and the real estate market collapsed.

Mock defaulted on her loan and National Collegiate Student Loan Trust (NCSL) sued her along with Kary Mock, who cosigned the loan. NCSL claimed the Mocks owed $37,086,54, together with accrued interest of $5,645.37 for a total debt of $42,731,91.

The Mocks fought the suit in court, acting as their own lawyers. They argued that the interest rate was usurious, the loan was predatory, and NCSL had not provided proper documentation to support its claim.

The trial court ruled for NCSL, entering a judgment of $37,086.54; and the Mocks appealed.

Justice Harvey Brown, writing for the Texas Court of Appeals (First Circuit) rejected the Mocks' usury argument and their argument that the loan was predatory on its face. But Judge Brown reduced the amount of the judgment to $24,408.72 on evidentiary grounds, ruling that NCSL had not produced documentary evidence to support a larger amount.

Why is this Texas court opinion significant? Three reasons:

1) The case shines a light on the shady private student-loan industry. As we see from the Mock case, banks and financial institutions are marketing private student loans all across the United States, charging high interest rates--far higher than students pay on their federal loans. These loans are then bundled into pools (sometimes called (SLABS) and sold to investors.

2) Private student loans are as difficult to discharge in bankruptcy as federal student loans, which makes them especially attractive to investors.  A lot of fat cats are happy to buy SLABS packed with student loans bearing high interest rates, secure in the knowledge that these loans are almost impossible to discharge in the bankruptcy courts.

3) People taking out private student loans are making bad decisions. We don't know Casondra Mock's circumstances, but surely she made a bad decision when she took out a 20-year loan at 14 percent interest to finance her studies at the University of Houston at Clear Lake. She could have taken out a federal student loan with an interest rate half the rate charged by that Rhode Island bank.

Perhaps Casondra had already maxed out her federal student loans and needed more money to pursue her studies. But even if that were the case, surely there was a better way to address her financial needs than taking out a 20-year loan at 14 percent interest.

Acting at the behest of the big banks, Congress put private student loans under the "undue hardship" standard in the 2005 Bankruptcy Reform Act. Some reform!  Congress should repeal the "undue hardship" provision for both federal and private student loans as numerous policy experts have urged. And I'm sure Congress will correct its mistake someday--someday when pigs fly and the lions lie down with the lambs.

Someday, Congress will repeal the "undue hardship" clause in the Bankruptcy Code.

References

Mock v. National Collegiate Student Loan Trust, No. 01-17-00216-CV (Tex. Ct. App. July 10, 2018).

Parents join their children in Student-Loan Siberia, taking out bigger and bigger Parent PLUS loans to finance their children's bad college choices

Remember the movie Fiddler on the Roof? Perhaps the most poignant scene is the one in which Tevye waits with his daughter Hodel for the train that will take Hodel to Siberia. As you recall, Hodel married Perchik, a Russian revolutionary, without her father's permission. Perchik then got himself arrested and exiled to the Siberian wilderness.

Did Hodel say: "Good luck, honey!" "Don't forget to write!"  Or, "I told you not to become a revolutionary, but you didn't listen!"

No, she didn't. Instead, Hodel hopped a train and joined Perchik in Siberia.

Something similar is happening with Parent PLUS loans. Students are taking out more and more federal loans to finance their college studies, and many are taking out the maximum amount they are allowed to borrow for their undergraduate education--$31,000. In fact, 40 percent of undergraduate borrowers have loans totally $31,000 before they begin their senior year.

What to do? Many are turning to their parents to fill the gap. In 2015-2016, Parent PLUS loans averaged $33,291, up 14 percent in just four years. In fact, two thirds of parents who took out Parent PLUS loans in 2015-2016 did so to finance their children's undergraduate education.

As Mark Kantrowitz explained in a New York Times interview, "Parents are a pressure-relief valve for when students hit the Stafford loan limits."

I suppose that's one way of putting it. But really, the rise in Parent PLUS loans means some parents are bearing bigger student-debt loads than their children. And remember--Parent PLUS loans are as difficult to discharge in bankruptcy as student loans. No student loan can be discharged unless the debtor can show "undue hardship," a very tough standard to meet.

Some parents who take out Parent PLUS loans will find them very difficult to repay. In fact, the lending standards for issuing these loans are very low.  Parent debtors who lose their jobs, develop serious illnesses, or have various kinds of family emergencies may find it almost impossible to make payments on their Parent PLUS loans.  And bankruptcy will probably not be an option.

And let's face facts. If students cannot finance their college choices without pushing their parents into debt, they chose the wrong college.

So Mom and Dad, think of Hodel before you take out Parent PLUS loans to finance your children's college education. If your children cannot pay back their own student loans, they may be forced into long-term income-based repayment plans that last 20 or even 25 years. In which case, your children will be entering Student-Loan Siberia--saddled by debt for most of their working lives.

And, Mom and Dad, if you take out Parent PLUS loans, you may wind up like Hodel--headed for Student-Loan Siberia as well. If that happens it will be because your darling child made a bad choice about where to go to college and you foolishly agreed to help foot the bill.

Goodbye, Dad. Perchik made a dumb decision and I'm going to join him in Siberia.

References

Tara Siegel Bernard and Karl Russell. The New Toll of Student Debt in 3 Charts. New York Times, July 11, 2018.

Alexandra Acosta-Coniff v. ECMC: A single mother wins bankruptcy relief from student loans but sees victory snatched away on appeal

In 2013, Alexandra Acosta-Conniff, an Alabama school teacher and single mother of two children, filed an adversary proceeding in an Alabama bankruptcy court, hoping to discharge student loans that had grown to $112,000.  She did not have an attorney, so she represented herself in court.

At her trial,  Judge William Sawyer applied the three-part Brunner test to determine whether Acosta-Conniff met the "undue hardship" standard for having her student loans discharged in bankruptcy.

First, Judge Sawyer ruled, Conniff could not pay back her student loans and maintain a minimal standard of living for herself and her two children. Thus she met the first part of the Brunner test.

Second, Conniff's economic circumstances were not likely to change in the foreseeable future. Conniff was a rural school teacher, Judge Sawyer pointed out, who could not expect a significant rise in income. Although she had obtained a doctorate in education, that doctorate had not paid off financially.

Third, Judge Sawyer ruled, Conniff had handled her student loans in good faith. She had made monthly payments over several years and she had obtained deferments from making payments--deferments she was eligible to receive. In Judge Sawyer's view, Conniff met the good-faith requirement of the Brunner test.

In short, Judge Sawyer determined, Conniff qualified for bankruptcy relief under the Bankruptcy Code's "undue hardship" standard as interpreted by Brunner.  Accordingly, the judge discharged all of Conniff's student-loan debt.

ECMC appealed, and Judge Keith Watkins reversed. Fortunately, retired bankruptcy judge Eugene Wedoff volunteered to represent Conniff without charge, and Wedoff and his associates took her case to the Eleventh Circuit Court of Appeals.

In 2017, four years after Conniff filed her adversary proceeding, the Eleventh Circuit reversed the trial court,  directing Judge Watkins to review Judge Sawyer's ruling under the "clear error" standard. In other words, unless Judge Sawyer had committed clear error in deciding for Conniff, Judge Watkins was bound to uphold Sawyer's decision. The Eleventh Circuit remanded the case back to Judge Watkins to straighten things out.

In January 2018, Judge Watkins issued his second opinion in Conniff's case, and he concluded that Judge Sawyer had indeed committed clear error when he ruled in Conniff's favor. Judge Watkins' opinion is a bit convoluted, but basically he said Judge Sawyer made a mistake in failing to determine whether Conniff was eligible for an income-contingent repayment plan (ICRP).

In Judge Watkins' opinion, if Conniff can make even small loan payments under an ICRP and still maintain a minimal standard of living, she is not eligible for bankruptcy relief.

So what does this mean?

It means Alexandra Acosta-Conniff must return to bankruptcy court a second time--more than three years after her first trial. Apparently, Judge Sawyer will not schedule a second trial; instead, he has asked Conniff and ECMC to submit proposed findings of facts. At some point, Judge Sawyer will issue his second opinion on Conniff's case.

Conniff owed $112,000 in 2015, when she was 44 years old. Her debt has grown over the last three years due to accrued interest, and Conniff is older. She is now 47 years old.

What does the future hold for Alexandra Acosta-Conniff? More litigation.

If Conniff wins her second trial, ECMC, ruthless and well financed, will undoubtedly appeal again; and the case will ultimately go back to the Eleventh Circuit a second time. Conniff now has an able lawyer, so if she loses before Judge Sawyer, she will likely appeal. So--win or lose--Conniff is in for at least two more years of stressful litigation. When this is all over, Conniff will likely be 50 years old.

Here's my take on Conniff's sad odyssey through the federal courts. First, Judge Watkins' most recent decision is deeply flawed. In Watkins' view, a student-loan debtor who can make even small loan payments under an ICRP while maintaining a minimal standard of living cannot discharge her student loans in bankruptcy: period.

But if that were true, then no student-loan debtor is eligible for bankruptcy relief. In several cases, ECMC or the U.S. Department of Education has argued that a student-loan debtor  living at or below the poverty line should be denied bankruptcy relief  and required to enter into an ICRP even though the debtor would be required to pay zero. In fact, ECMC and DOE have been arguing for years that basically every destitute student-loan debtor should be put in an ICRP and denied bankruptcy relief.

Do want some examples? Roth v. ECMC (9th Cir. BAP 2013), Myhre v. U.S. Department of Education (Bankr. W.D. Wis. 2013), Abney v. U.S. Department of Education (Bankr. W.D. Mo. 2015), Smith v. U.S. Department of Education (Bankr. D. Mass. 2018).

The Roth case illustrates the insanity of this point of view. In that case, ECMC fought bankruptcy relief for Janet Roth, an elderly retiree with chronic health problems who was living on less than $800 a month in Social Security benefits. Put her in an ICRP, ECMC insisted, even though she would be required to pay nothing due to her impoverished circumstances.

The Ninth Circuit's Bankruptcy Appellate Panel pointed out the absurdity of ECMC's position. It would be pointless to put Roth in an ICRP, the court ruled. "[T]he law does not require a party to engage in futile acts."

Forcing Alexandra Acosta-Conniff into an ICRP, which Judge Watkins obviously desires, is a futile act. She will never pay off her student loans, even if she makes small monthly income-based payments for the next 25 years.

Acosta-Conniff is a big, big case. If Judge Watkins' hardhearted view prevails, then bankruptcy relief for student-loan debtors is foreclosed in the Eleventh Circuit. If the compassionate and common-sense spirit of Judge Sawyer's original 2013 opinion is ultimately upheld, then distressed student-loan debtors like Alexandra Costa-Conniff will get the fresh start that the bankruptcy courts were intended to provide.

The Eleventh Circuit Court of Appeals will ultimately have to look at Alexandra Acosta-Conniff's case a second time.  But her next trip to the Eleventh Circuit is likely at least two years away.

The Honorable Judge Keith Watkins

References

Acosta-Conniff v. ECMC, 536 B.R. 326 (Bankr. M.D. Ala. 2015).

ECMC v. Acosta-Conniff, 550 B.R. 557 (M.D. Ala. 2016).

ECMC v. Acosta-Conniff, 686 Fed. Appx. 647 (11th Cir. 2017).

ECMC v. Acosta-Conniff, 583 B.R. 275 (M.D. Ala. 2018).

Should courts look for bad faith when distressed student-loan debtors ask for bankruptcy relief? Further reflections on Smith v. Department of Education

Distressed debtors cannot discharge student loans unless they can show their loans constitute an "undue hardship" to themselves and their dependents. Congress did not define undue hardship in the Bankruptcy Code, so it was left to the courts to define the term.

Most courts have adopted the Brunner test for determining when a student loan is an undue hardship that can be discharged in bankruptcy. That test has three parts:

1) Can the debtor pay back the loan while maintaining a minimal standard of living?
2) Will the debtor's financial circumstances change during the lifetime of the loan?
3) Did the debtor handle his or her loans in good faith?

In Smith v. Department of Education, decided a few months ago, Judge Frank Bailey, a Massachusetts bankruptcy judge, explicitly criticized the Brunner test's  "good faith" component:

[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)

 Judge Bailey argued for a simpler and fairer standard for determining when a student loan 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) (italics supplied).

Eliminating the good faith component of the Brunner test would have a huge impact on student-loan bankruptcy jurisprudence because the Department of Education and its thug debt collectors almost always argue that a debtor filed for bankruptcy in bad faith. And this is ironic because it is the Department of Education, not student-loan debtors, that repeatedly demonstrates bad faith in the bankruptcy courts.

Let's take the Smith case as an example:

1) First of all, the U.S. Department of Education has publicly proclaimed it will not oppose bankruptcy relief for student debtors who are disabled. Mr. Smith is disabled; and Smith and his mother subsist entirely on Smith's monthly disability check, food stamps, and his mother's tiny Social Security income. Thus, DOE was opposing Mr. Smith's plea for bankruptcy relief in direct contradiction to DOE's own policy. In my opinion, that shows DOE's bad faith.

2) In a 2015 letter, a Department of Education official said DOE would not oppose bankruptcy relief when it made no economic sense to do so. Smith's adversary proceeding stretched out over five days, taking up Judge Bailey's time; and both Smith and DOE had lawyers. (In fact, DOE had two lawyers.) Smith only borrowed $29,000; and the litigation expenses almost certainly exceeded that amount. In my view, DOE's decision to chase Smith into bankruptcy court is additional evidence of bad faith.

3) Finally, DOE insisted Smith should be put in a long-term income-based repayment plan, even though it admitted Smith's income was so low that his monthly loan payments would be zero. So what was the point of fighting Smith in bankruptcy court? Again, this is more evidence of DOE's bad faith.

In fact, the Department of Education and the student loan guaranty agencies (ECMC in particular) almost always argue that a distressed student-loan debtor filed for bankruptcy in bad faith. And this is true even when the debtor is hovering on the brink of homelessness.

After all, in the Myhre case, DOE opposed student-loan debt relief for a quadriplegic whose expenses exceeded his income.  In the Abney case, DOE fought Kevin Abney, who was so poor he did not own a car and traveled to work on a bicycle. And in the Stevenson case, ECMC objected when Janice Stevenson, a woman with a record of homelessness and who lived in subsidized housing, tried to discharge almost $100,00 in student loans.

So Judge Bailey is right. The federal courts should stop asking whether down-and-out student-loan debtors handled their student loans in good faith. The only important questions are these: Can the debtor pay back his or her student loans? Will the debtor ever be able to pay back those loans?

And if the courts continue to insist on looking for bad faith, they should look for it by the Department of Education, ECMC, and the entire gang of government-subsidized debt collectors.

References

Jillian Berman. Why Obama is forgiving the student loans of almost 400,000 people. Marketwatch.com, April 13, 2016.

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015. 

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

Michael Stratford. Feds May Forgive Loans of Up to 387,000 Borrowers. Inside Higher Ed, April 13, 2016. 

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).

Some physical or mental impairments can qualify you for a total r permanent disability discharge on your federal student loans and/or TEACH grant service obligation. U.S. Department of Education web site (undated).

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 Corporation, 490 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)

College dropouts who don't pay off their student loans: The village of the damned

About 70 percent of high school graduates go on to college, but a lot of them drop out before getting their college degrees. And a good number of dropouts took out student loans to finance their studies.

What happens to these people?

A recent survey polled college dropouts who had outstanding student loans; and this is what the pollsters found.

• Respondents reported that they had, on average, almost $14,000 in student-loan debt.

• More than half of college dropouts said they were not making any payments on their student loans.

• More than a third of the survey respondents (35 percent) said they had not made a single payment on their student-loan debt. 

What are we to make of this?

First of all, indebted college dropouts are probably underestimating how much they owe on student loans. Other studies have shown that a lot of student borrowers are hazy about how much they borrowed, and some don't know the interest rate on their loans. Quite a few don't know the difference between federal loans and private loans, and aren't sure which type of loans they have.

So it seems fair to conclude that if indebted college dropouts report that they owe an average of $14,000, they probably owe more--maybe a lot more. For one thing, dropouts who aren't making loan payments may not understand how much accrued interest has been added to their loan balances. And dropouts who defaulted on their student loans may not realize that the debt collectors undoubtedly added default penalties to their accumulated debt.

It is true that some dropouts who aren't making student-loan payments may have obtained economic hardship deferments that temporarily excuse them from making monthly loan payments. But interest accrues on a student loan while it is in economic hardship status, which means that the loan balance is growing month by month.

This is what we can say for sure: Last year, 1.1 million student-loan borrowers defaulted on their loans at an average rate of 3,000 people each day.  And some percentage of that number are people who took out student loans to attend college and then dropped out.

Indebted college dropouts don't know it, but they have entered the village of the damned. If they defaulted on their student loans, the loan balances ballooned due to default penalties. Even if their loans are in forbearance, interest continues to accrue. At some point, these unfortunate dropouts will realize they are carrying debt loads they can't pay off.

At that point, they will only have two options. They can enter an income-driven repayment plan, which will stretch their payments out for 20 or 25 years. Can you imagine making monthly payments on student loans for a quarter of a century even though you dropped out of college without a degree?

The other option is bankruptcy, and that option is going to be more and more viable as the bankruptcy courts wake up to the fact that the student-loan program is a catastrophe that has wreaked misery and suffering on millions.

In my view, now is the time for people who are overwhelmed by student debt to file for bankruptcy.  It is true that student-loan debtors must prove undue hardship in order to get bankruptcy relief. But, as Matt Taibbi's article in Rolling Stone documented, a lot of people are suffering at the undue hardship level.

College droputs with student-loan debt: The village of the damned

References

Tyler Durden. (2017,November 7). About 33% of Students Drop Out of College; Here's How Many Go On to Default On Their Student Debt. zerohedge.com (blog).

LendEDU (2017, November 2). College Dropouts and Student Debt. LendEDU.com (blog).

Matt Taibbi. (2017, October). The Great College Loan Swindle. Rolling Stone.

The Wrong Move on Student Loans. New York Times, April 6, 2017.

Alan and Catherine Murray discharged more than $200,000 in student loans in a Kansas bankruptcy court and their victory was affirmed on appeal: Good news for middle-income college borrowers

In a previous essay, I wrote about Alan and Catherine Murray, a married couple in their late forties who defeated Educational Credit Management Corporation in a Kansas bankruptcy court.  ECMC appealed, and the Murrays prevailed again--a victory that has important implications for middle-income student-loan debtors.

The Murrays took out student loans in the 1990s to obtain undergraduate degrees and master's degrees. Their total indebtedness was $77,000, which they consolidated in 1996 at an interest rate of 9 percent.

Over the years, the Murrays paid $54,000 toward paying off these loans--70 percent of the amount they borrowed. But they obtained economic hardship deferments during periods of financial stress, which allowed them to skip some loan payments.  And they entered into an income-based repayment plan to lower their monthly payments to a manageable level.

Although the Murrays handled their student loans in good faith, interest on their debt continued to accrue; and they made no progress toward paying off their debt. In fact, when they filed for bankruptcy in 2014, their loan balance had ballooned to $311,000--four times what they borrowed!

Judge Dale L. Somers, a Kansas bankruptcy judge, gave the Murrays a partial bankruptcy charge. It was clear, Judge Somers ruled, that the Murrays could not pay off their total student-loan indebtedness and maintain a minimal standard of living. And it was also clear that their financial situation was not likely to change. Finally, Judge Somers concluded, the Murrays had handled their student loans in good faith--an essential requirement for discharging student loans in bankruptcy.

On the other hand, Judge Somers determined, the Murrays could pay off the original amount they borrowed ($77,000) and still maintain a minimal standard of living. Thus, Judge Somers discharged the accumulated interest on the Murrays' debt, but required them to pay back the original amount they borrowed.

ECMC, the Murrays' ruthless creditor, appealed Judge Somers' decision. ECMC argued, as it always does, that the Murrays should be put in a long-term income-based repayment plan (IBR) that would last from 20 or 25 years.

But U.S. District Court Judge Carlos Murguia, sitting as an appellate court for the appeal, affirmed Judge Somers' decision. "The court agrees with Judge Somers' findings and conclusions that [the Murrays] made a good faith effort to repay their loans," Judge Murguia wrote.

Significantly, Judge Murguia, ruling in the capacity of an appellate judge, explicitly rejected ECMC's argument that the Murrays should be placed in an IBR and that none of the Murrays' $311,000 debt should be forgiven.

"The court disagrees," Judge Murguia wrote. "Under the circumstances of this case, debtors' payments under an IBR plan are insufficient even to stop the accrual of additional interest, and such payments directly contravene the purpose of bankruptcy."  Judge Murguia noted that Judge Somers had not discharged all of the Murrays' indebtedness--only the accumulated interest. "He discharged that portion--the interest--that had become an undue hardship on debtors, denying them a fresh start."

ECMC v. Murray is an important case for two reasons: First, this is one of the few student-loan bankruptcy court decisions that have granted relief to middle-income student borrowers. The Murrays' combined income was about $95,000.

Second, the key ruling by both Judge Somers and Judge Murguia was their finding that the interest on the original debt would constitute an undue hardship for the Murrays if they were forced to pay it back. Furthermore, this would be true even if the Murrays were placed in an IBR because the monthly payments under such a repayment plan were insufficient to stop the accrual of interest.

There are hundreds of thousands of people in circumstances very similar to the Murrays. Their loan balances have doubled, tripled or even quadrupled due to accumulating interest. People in this situation will never pay off their total indebtedness. But most of these people, like the Murrays, can pay off the amount they originally borrowed if only the accumulated interest were wiped out.

Let us hope student loan debtors situated like the Murrays will learn about ECMC v. Murray and find the courage to file bankruptcy and seek a discharge of their student loans--or at least the accumulated interest.  After all, it is the accumulated interest, penalties and fees that have put millions of student borrowers in a hopeless situation. The Murray decision offers a fair and reasonable solution for these people and gives them a fresh start. A fresh start, after all, is the core reason that  bankruptcy courts exist.


References

Murray v. Educational Credit Management Corporation (Bankr. D. Kan. 2016), aff'd, No. 16-2838 (D. Kan. Sept. 22, 2017).

Hofstra Law School Graduate incurs nearly one million dollars in debt: Dufrane v. Navient Solutions

Who holds the record for accumulating the most debt while going to college and law school? I don't know, but it might be Scott Dufrane.

Mr. Dufrane attended Thomas Jefferson Law School and graduated from the Maurice A. Deane School of Law at Hofstra University in 2009. He financed his undergraduate and legal education with student loans, and by the time he received his law degree, he had incurred debt of nearly a million dollars--or more specifically, $900,000.

Dufrane filed for bankruptcy in 2015. At that time  he owed the U.S. Department of Education approximately $400,000; and he owed various private creditors about $500,000. 

A short time after filing his bankruptcy petition, Dufrane filed an adversary complaint in an effort to discharge his private loans. In his complaint, he argued that the private loans fell outside the protection of the "undue hardship" rule and were dischargeable.

Dufrane owed SunTrust Bank about $90,000, and SunTrust moved to dismiss Dufrane's adversary complaint on the grounds that the SunTrust loans were protected by 11 U.S.C. sec. 523(a)(8) and could not be discharged unless Dufrane met the "undue hardship" standard.

But Dufrane had an answer to SunTrust's argument.

He argued that the private loans were not "qualified student loans" under 11 U.S.C. sec. 528(a) (8) and could be discharged like any other nonsecured debt.  Dufrane said that the private lenders had solicited him to borrow money while he was in school without any inquiry "regarding need, cost of tuition, or cost of any other education-related expense." In addition, the private lenders' solicitations "generally stated that the money could be used for anything, and that it would be disbursed directly to [Dufrane]" and not through any school.

Moreover, Dufrane alleged, all the private loan money was disbursed directly to him "without any input, knowledge or approval of the Financial Aid Office . . ."

Judge Peter Carroll, a California bankruptcy judge, agreed with Dufrane and ruled that the private loans were not the type of loan that Congress intended to exclude from bankruptcy relief.   Judge Carroll acknowledged that federal courts were divided on this issue, but he agreed with courts that interpreted the law in harmony with Dufrane's position. Therefore, the judge denied SunTrust's motion to dismiss. Under the rationale of Judge Carroll's ruling, it seems possible that all $500,000 of Carroll's private loan debt will ultimately discharged.

What is the significance of the Dufrane decision?

First, as Judge Carroll pointed out, the federal courts are in disagreement about whether some private student loans are subject to the "undue hardship" rule, and this controversy may ultimately go to the Supreme Court. For now, however, student borrowers who responded to bank solicitations by taking out private loans and who received the money directly have an argument that those loans are dischargeable in bankruptcy like any other consumer loan.

Second, the Dufrane case illustrates the recklessness of student-loan creditors--both the federal government and private banks.  It was insane for the Department of Education to loan Dufrane $400,000 for college and lawschool studies.  And of course it was insane for private lenders to loan Dufrane $500,000 while he was in law school.

Almost no one who accumulates nearly a million dollars in debt to get a college degree and a law degree will ever be able to pay back that amount of money.  Hofstra's law school is ranked 118 on the list of best law schools published by U.S. News & World Report. But even if Hofstra had graduated from Yale Law School at the top of his class, it is unlikely he would have obtained a job that would allow him to pay back $900,000.

Millions of Americans are struggling with  student-loan debt. Last year, student borrowers were defaulting at an average rate of 3,000 a day. 

The Department of Education is urging borrowers to enroll in income driven repayment plans (IDRs), but the Government Accountability Office reported last December that about half of a sample of people who signed up for IDRs failed to recertify their income as the program requires (p. 36). It seems obvious that IDRs are no magic bullet for the student-loan crisis.

Bankruptcy relief is the only viable option for people whose student loans are out of control. Last month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill to make student-loan debt dischargeable in bankruptcy like any other nonsecured loan.  This bill is unlikely to become law in this Congressional session; but someday, Congress will be forced by reality to pass some form of the Delaney-Katko bill.

References

Dufrane v. Navient Solutions, Inc. (In re Dufrane), 566 B.R. 28 (Bankr. C.D. Cal. 2017).

Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.

Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.

The Wrong Move on Student Loans. New York Times, April 6, 2017.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accountability Office, November, 2016.