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

Davis v. U.S. Department of Education: Another law graduate is denied student-loan bankruptcy relief

Few overburdened student-loan debtors attempt to get their loans discharged in bankruptcy. Most believe their student loans are not dischargeable as a matter of law. But among the small number of people who file for bankruptcy and try to get their student loans forgiven, a fair number are law-school graduates.

A handful of law-school graduates have been successful in bankruptcy court: the Barrett case out of California, the Hedlund case out of the state of Washington, and, more recently, the Rosenberg decision out of New York are examples of good outcomes for law graduates. But most are unsuccessful.

Davis v. U.S. Department of Education is the latest in a string of decisions in which a J.D. graduate with crushing debt is denied relief by a federal bankruptcy judge. Jeffrey Michael Davis graduated from John Marshall Law School in 2008, Apparently, Davis "performed poorly in law school" (p. 706), but he obtained an LL.M. degree (an advanced law degree) from John Marshall in 2013. At the time his adversary case was decided, he was 41 years old.

After graduating from law school, Davis sought full-time employment but he was not able to find a steady job as a lawyer. After graduation, he worked as a document review attorney on a contract-to-contract basis.  In other words, in the 11 years since graduating from John Marshall Law School, he never secured a full-time job in the legal field.  His salary in 2018 was approximately $61,000, above the poverty level. Nevertheless, Davis was the father of a young child with disabilities, and his childcare expenses were significant.

Davis financed his law studies with student loans from both the federal government and a private lender. By the time he arrived in bankruptcy court, his total indebtedness was $351,000. According to Illinois Bankruptcy Judge Timothy Barnes, Davis made some payments on his DOE loans but had made no payments on his federal Stafford loans or his private loans.

Judge Barnes analyzed Davis's petition for relief under the three-part Brunner test and concluded that Davis did not meet even one of the three parts.

In Judge Barnes' opinion, Davis could not meet part one of the Brunner test because he could not show that he would be unable to maintain a minimal standard of living if forced to pay back his student loans.  In the judge's view, Davis had not lived frugally enough, noting disapprovingly that Davis subscribed to some streaming services.

The judge also pointed out that Davis had not applied for higher-paying jobs over the past four or five years. "In the absence of efforts to secure a higher-paying position, whether as an attorney or otherwise, and given the lack of other evidence regarding efforts to increase his income, [Davis] has failed to demonstrate that he has maximized or attempted to maximize his income" (p. 705).

Regarding part two of the Brunner test, Judge Barnes ruled that Davis "failed to demonstrate the existence of additional circumstances indicating that [he] will likely be unable to repay the Students Loans for a significant portion of the repayment period " (p. 707). The judge pointed out that Davis has at least 20 more years of earning potential.  The judge indicated that Davis had shown no unusual circumstances that would hinder him from finding a higher paying job.

Finally, Judge Barnes concluded that Davis had not been able to demonstrate that he had made good faith efforts to repay his loans. The fact that Davis had not made any payments on some of his loans "weighs against a finding of good faith" (p. 708). Judge Barnes ruled. And--as the judge had already indicated, he did not think Davis had tried to maximize his income, minimize his expenses, or look for a higher paying job.

I disagree with Judge Barnes' decision.  First, Judge Barnes is a lawyer himself. Surely he knows that the job market for lawyers in the U.S.  has been terrible since Davis graduated from law school in 2008. The judge should also know that the job possibilities for people who graduate from undistinguished law schools like John Marshall and who do not have stellar grades face particularly grim job prospects.

Finally, Judge Barnes should know that an L.L.M. degree from a lackluster law school like John Marshall often does not make a lawyer more marketable. In fact, for many J.D. graduates, an advanced degree in law merely adds to a lawyer's debt load.

In my view, the only question Judge Barnes should have considered when evaluating Mr. Davis's case is this: Can Mr. Davis repay $351,000 in student loans?

The answer to that question is undoubtedly no. Judge Barnes concluded that Barnes had not looked hard enough for a better job, but who would not look for better wages if a higher paying job was at least a remote possibility.

I doubt very much whether Davis--who has a law degree and an advanced law degree--likes working on a contract-to-contract basis for $61,000 a year. But I feel sure he is doing the best he can.  Apparently, he has worked consistently in the field of law for 11 years. He should get some credit for that.

If the Department of Education thinks it achieved something by opposing Mr. Davis's request for student-loan relief, it is deluding itself.  I think it is highly likely that Davis will be forced into an income-based repayment plan that will end when he is 66 years old and that accruing interest on his debt will prevent him from ever paying off his loans--now more than a third of a million dollars.

A compassionate ruling, a sensible ruling, and the right ruling would be for Judge Barnes to forgive all of Davis's crushing debt and give him the fresh start. That is the bankruptcy courts' duty, after all, to give honest but unfortunate debtors a fresh start.

References

Davis v. U.S. Department of Education (in re Davis), 608 B.R. 693 (Bkrtcy N.D. Ill. 2019).

Another Catholic diocese faces bankruptcy: Should Catholics give a damn?

I don't know whether Rhett Butler was a Catholic, but Catholics should adopt Rhett's attitude about the rising tide of bankruptcies among America's Catholic dioceses.  Frankly, my dears, we should not give a damn.

Nineteen Catholic dioceses have filed for bankruptcy in recent years, due to payouts forced on the Church by child-abuse victims, almost all of whom were raped or sexually abused by Catholic priests. The National Catholic Reporter compiled a list of 131 financial settlements between the Catholic Church and child abuse victims--most of them for a million dollars or more.

According to the Buffalo News, the Diocese of Buffalo, New York may be the twentieth American diocese to file for bankruptcy.  NCR's Carolyn Thompson reported a few days ago that the Buffalo Diocese has already paid out about $18 million to 100 child abuse victims and has 220 lawsuits pending against it.

Not surprisingly, the sexual abuse scandal has demoralized Catholic laypeople all over the United States. No one knows how many Catholics have left the Church due to this moral catastrophe, but it is clear that Catholic laypeople have drastically cut back on their financial contributions to the Church.

The Buffalo Diocese provides an example. Jay Tokasz, writing for the Buffalo News, reported that the diocese suffered a $5 million budget deficit last year even though it cut its budget by $1.9 million.

Donations to the diocese had dropped by a whopping one third in just one year.  In 2018, the Buffalo Diocese received approximately $18 million in donations. In 2019, donations fell to about $13 million.  That's a huge vote of no confidence in the Buffalo hierarchy's leadership. 

Catholics are frustrated and enraged by the Church’s sexual abuse scandal. How, we ask ourselves, can a church that calls itself the Bride of Christ allow men to rape and sodomize children—both boys and girls?  How could the Church allow rapists to continue in their ministry and how could it have resorted to sleazy legal maneuvers to hide the scandal?

The arrogance and indifference of the American Catholic bishops are destroying the Church’s financial viability—which is a good thing. Lay Catholics have simply stopped giving money to the son-of –a-bitches who have countenanced human trafficking in parish rectories for more than half a century.

 In fact, it is not too much to say that many Catholic bishops are themselves human traffickers who moved pedophiles around from parish to parish. Instead of bringing children to pedophiles, the Church sent pedophiles to the children. So much more efficient!

I stopped giving money to the Catholic Church about three years ago. My wife and I now make regular monthly contributions to Casa Juan Diego, the Catholic Worker hospitality house in Houston, Texas. We know that every dollar we send to Casa Juan Diego will go to help the poor.

I urge other disappointed Catholics to join me. Stop funding the creeps who run the Catholic Church and give it to people who are doing Christ’s work—whether or not they are Catholics. 

*****

·        According to the National Catholic Reporter, the Catholic Church has paid out more than $3 billion in settlements and court awards to child abuse victims.  The following is a list of 131 settlements and the number of victims in each case (as reported by NCR).

·        2000-03-15 — Santa Rosa, California — $1.6 million — 4

·        2000-12-04 — Los Angeles, California — $5.2 million — 1

·        2001-03-08 — Bridgeport, Connecticut — $15 million — 26

·        2001-12 — Oklahoma City, Oklahoma — $5 million — 1

·        2002-01-30 — Tucson, Arizona — $14 million — 11

·        2002-04-01 — Orange and LA, California — $1.2million — 1

·        2002-06 — Los Angeles, California — $1.5 million — 1

·        2002-06-14 — Omaha, Nebraska — $800.000 — 1

·        2002-08-23 — Orange, California — $400.000 — 1

·        2002-09-04 — Los Gatos, California – Jesuits — $7.5 million — 2

·        2002-09-09 — Providence, Rhode Island — $13.5 million — 36

·        2002-09-18 — Boston, Massachusetts — $10 million — 86

·        2002-10-10 — Manchester, New Hampshire — $950.000 — 16

·        2002-11-26 — Manchester, New Hampshire — $5.1 million — 62

·        2003-01-09 — Boston, Massachusetts (Jesuits) — $5.8 million — 15

·        2003-01-29 — Metuchen, New Jersey — $800,000 — 10

·        2003-03-13 — Camden, New Jersey — $880,000 — 23

·        2003-05-08 — Manchester, New Hampshire — $815.000 — 4

·        2003-05-22 — Manchester, New Hampshire — $6.5 million — 61

·        2003-05-22 — Manchester, New Hampshire — $2.1 million — 33

·        2003-06-10 — Louisville, Kentucky — $25.7 million — 243

·        2003-06-30 — San Bernardino, California — $4.2 million — 2

·        2003-07-01 — Chicago, Illinois — $1.9 million — 1

·        2003-07-10 — Chicago, Illinois — $4 million — 4

·        2003-08-14 — Tucson, Arizona — $1.8 million — 5

·        2003-09-09 — Boston, Massachusetts — $84.2 million — 552

·        2003-09-11 — Seattle, Washington — $7.9 million — 15

·        2003-10-02 — Chicago, Illinois — $8 million — 15

·        2003-10-11 — Covington, Kentucky — $5.2 million — 27

·        2003-10-16 — Bridgeport, Connecticut — $21million — 40

·        2003-11-24 — Oakland, California — $1 million — 1

·        2003-12-04 — Covington, Kentucky — $1million — 5

·        2004 — Bridgeport, Connecticut — $40,000 — 2

·        2004-01-23 — Oakland, California — $3 million — 1

·        2004-01-28 — Covington, Kentucky — $2 million — 7

·        2004-04-15 — St. Petersburg, Florida — $1.1 million — 12

·        2004-04-21 — St. Louis, Missouri — $1.7 million — 1

·        2004-05-27 — Altoona-Johnstown, Pennsylvania — $3.7 million — 21

·        2004-07-03 — Toledo, Ohio — $500,000 — 2

·        2004-08-17 — Springfield, Massachusetts — $7.8 million — 46

·        2004-08-20 — Toledo, Ohio — $1.2 million — 23

·        2004-08-26 — St. Louis, Missouri  — $2 million — 18

·        2004-09-22 — Miami, Florida — $3.4 million — 23

·        2004-10-08 — Newark, New Jersey — $1 million — 10

·        2004-10-28 — Davenport, Iowa — $9 million — 37

·        2004-12-02 — Orange, California — $100 million — 91

·        2004-12-17 — Seattle, Washington — $1.8 million — 12

·        2004-12-23 — Oakland, California — $6.3 million — 3

·        2005-02-15 — Paterson, New Jersey — $5 million — 27

·        2005-03-08 — Cincinnati, Ohio — $3.2 million — 120

·        2005-03-24 — Oakland, California — $437,000 — 1

·        2005-03-31 — Fort Worth, Texas — $1.4 million — 1

·        2005-04-07 — Fairbanks, Alaska-Jesuits — $1 million — 1

·        2005-04-09 — Fort Worth, Texas — $2.7 million — 1

·        2005-04-15 — Oakland, California — $1.9 million — 2

·        2005-04-20 — San Francisco, California — $5.8 million — 4

·        2005-04-22 — Santa Rosa, California — $3.3 million — 1

·        2005-05 — Orlando & St. Augustine, Florida — $1.5 million — 3

·        2005-05-09 — Davenport, Iowa — $1.9 million — 1

·        2005-05-19 — Stockton, California — $3 million — 1

·        2005-06-10 — San Francisco, California — $21.2 million — 15

·        2005-06-10 — Seattle, Washington — $1.7 million — 4

·        2005-06-29 — Sacramento, California — $35million — 33

·        2005-06-30 — Boston, Massachusetts — $33.1 million — 257

·        2005-07-01 — Santa Rosa, California — $7.3million — 8

·        2005-07-08 — San Francisco, California — $16.0 million — 12

·        2005-08-05 — Oakland, California — $56 million — 56

·        2005-08-27 — Seattle, Washington – Benedictines — $2.6 million — 7

·        2005-09-02 — San Francisco, California — $4 million — 4

·        2005-10-11 — San Francisco, California — $2.6million — 2

·        2005-11-01 — Hartford, Connecticut — $22million — 43

·        2006-01-09 — Covington, Kentucky — $2.5 million — 19

·        2006-01-09 — Covington, Kentucky — $79 million — 243

·        2006-02-21 — Dubuque, Iowa — $5 million — 20

·        2006-03-13 — Los Angeles, California – Franciscans — $28 million — 25

·        2006-03-16 — Jackson, Mississippi — $5.1 million — 19

·        2006-04-01 — Seattle, Washington — $1 million — 2

·        2006-06-30 — Boston, Massachusetts — $6.3 million — 86

·        2006-08-04 — Anchorage, Alaska and Boston, Massachusetts — $1.4 million — 5

·        2006-09-01 — Milwaukee, Wisconsin — $16.7 million — 10

·        2006-10-27 — Los Angeles, California – Carmelites — $10 million — 7

·        2006-11-30 — Norwich, Connecticut — $1.1 million — 1

·        2006-12-01 — Los Angeles, California — $60 million — 45

·        2006-12-16 — Washington, D.C. — $1.3 million — 16

·        2007-01-05 — Denver, Colorado — $1.5 million — 15

·        2007-03-27 — Dubuque, Iowa — $2.6 million — 9

·        2007-03-29 — Fairbanks, Alaska and Oregon Province of Jesuits — $1.9 million — 4

·        2007-05-10 — Rockford, Illinois — $2.2 million — 2

·        2007-05-16 — Portland, Oregon — $1.3 million — 2

·        2007-05-18 — Rockville Centre, New York — $11.4 million — 2

·        2007-05-29 — Chicago, Illinois — $6.6 million — 15

·        2007-06-30 — Boston, Massachusetts — $2.1 million — 34

·        2007-07-14 — Los Angeles, California — $660 million — 508

·        2007-07-30 — Charleston, South Carolina — $10.3 million — 80

·        2007-08-30 — Charleston, South Carolina — $1.375 million — 11

·        2007-09-07 — San Bernardino, California — $15.1 million — 11

·        2007-09-13 — Santa Rosa, California — $5 million — 10

·        2007-10-05 — Orange, California — $6.6 million — 4

·        2007-10-19 — St. Louis, Missouri – Marianists — $160,000 — 1

·        2007-11-16 — Fairbanks, Alaska – Jesuits — $50 million — 110

·        2008-01-04 — Spokane, Washington – Jesuits — $4.8 million — 16

·        2008-01-18 — Wilmington, Delaware — $450,000 — 1

·        2008-04-10 — Dubuque, Iowa — $4.7 million — 18

·        2008-05-13 — Burlington, Vermont — $784,000 — 1

·        2008-05-14 — Los Angeles, California – Salesians — $19.5 million — 17

·        2008-06-30 — Boston, Massachusetts — $5.4 million — 55

·        2008-07-01 — Denver, Colorado — $5.5 million — 18

·        2008-08-12 — Chicago, Illinois — $12.6 million — 16

·        2008-08-19 — Kansas City-St. Joseph, Missouri — $10 million — 47

·        2008-08-27 — Belleville, Illinois — $5 million — 1

·        2008-08-29 — Providence, Rhode Island — $1.3 million — 4

·        2008-09-11 — Chicago, Illinois — $2.5 million — 1

·        2008-09-18 — Chicago, Illinois — $1.7 million — 1

·        2008-10-30 — Pueblo, Colorado – Marianists — $4.2 million — 23

·        2008-11 — Seattle, Washington - Christian Bros — $7.2 million — 11

·        2008-12-03 — Springfield, Massachusetts — $4.5 million — 59

·        2008-12-17 — Burlington, Vermont — $784,000 — 1

·        2009-01-29 — Seattle, Washington - Christian Brothers — $7million — 13

·        2009-02-28 — Memphis, Tennessee — $2 million — 1

·        2009-04-08 — Wilmington, Delaware — $1.5 million — 1

·        2009-06-03 — Monterey, California — $1.2 million — 1

·        2009-06-30 — Boston, Massachusetts — $3.6 million — 27

·        2009-07-21 — Chicago, Illinois — $3.9 million — 6

·        2009-10-09 — Burlington, Vermont — $784,000 — 1

·        2009-10-22 — Belleville, Illinois — $1.2 million — 1

·        2009-10-28 — Savannah, Georgia — $4.2 million — 1

·        2009-11-05 — Portland, Maine — $200,000 — 1

·        2010-05-03 — Indianapolis, Indiana — $199,000 — 1

·        2010-05-13 — Burlington, Vermont — $17.6 million — 26

·        2010-06-10 — Charlotte, North Carolina and Capuchins — $1.2 million —

·        2010-08-11 — Lansing, Michigan — $250,000 — 1