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).

Rowe v. ECMC : ECMC couldn't prove Mr. Rowe owed on his daughter's student loan

Educational Credit Management Corporation [ECMC] is the Department of Education's premier student-loan debt collector.

ECMC has appeared in literally hundreds of student-loan bankruptcy cases, and it knows all the legal tricks for defeating a student-loan borrower's efforts to discharge student loans in bankruptcy. And most of the time ECMC wins its cases.

But not always.

Last June, Judge Catherine Furay, a Wisconsin bankruptcy judge, ruled in favor of Thomas Rowe, who sought to discharge a student loan he said he didn't owe. ECMC claimed Rowe signed a student loan on behalf of his daughter. Rowe said he didn't sign the loan and that any signature appearing on the loan document must be a forgery.

Rowe declared bankruptcy and filed an adversary proceeding to discharge the student loan ECMC claimed he owed. A trial date was set, but neither Rowe nor ECMC filed the disputed loan document with the court.

Judge Furay ordered the parties to file briefs on the burden of proof and concluded the burden was on ECMC to prove Rowe owed on the student loan. Since ECMC did not produce the loan document, Judge Furay discharged the debt.

What the hell happened?

How could ECMC,, the most sophisticated student-loan debt collector in the entire United States, not produce the primary document showing Rowe had taken out a student loan?

I can think of only two plausible explanations. First, ECMC may have had the loan document in its possession but didn't produce it because the document would show Rowe was right-- he hadn't signed the loan agreement.

Second, the loan document may have gotten lost as ownership of the underlying debt passed from one financial agency to another.

Here is the lesson I take away from the Rowe case. If you are a student-loan debtor being pursued by the U.S. Department of Education or one of DOE's debt collectors, demand to see the documents showing you owe on the student loan.

Most times, the creditor will have the loan document, but not always. And, as Judge Furay ruled, the burden is on the creditor to show a loan is owed.

And so I extend my hearty congratulations to Thomas Rowe, who defeated ECMC, the most ruthless student-loan debt collector in the business. Thanks to Judge Furay's decision, Mr. Rowe can tell ECMC to go suck an egg.

References

Rowe v. Educational Credit Management Corporation, No. 17-0033-cf ( Bankr. W.D. Wis. June 28, 2018) (unpublished).

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.

Augustin v. U.S. Department of Education: Adventures in Fantasy Land (originally posted 10.26.2018)

 In  April 2016, Pierre Augustin filed an adversary complaint in a Maryland bankruptcy court, seeking to discharge $210,000 in student loan debt. He told the court he had been burdened by this debt for 24 years, and that his financial circumstances did not permit him to pay it back. Augustin's wife also had student-loan debt: $120,000. Together the couple had accumulated a third of a million dollars in student debt.

Augustin had three postsecondary degrees: a bachelor's degree in political science from Salem State University in Massachusetts, a master's degree in public administration from Suffolk University in Boston, and an MBA from University of Massachusetts Lowell. Seventeen years after receiving his MBA degree, he was working  as a security guard.

Augustin claimed he was unable to find a job in the field of his degrees, but together he and his wife earned a net income of more than $6,000 a month. The Department of Education (DOE) offered Augustin a 25-year income-based repayment plan that would allow him to pay $331 a month toward his student loans or a 15-year plan with payments of $1,138 a month.

Augustin did not accept DOE's offers. Under the 25-year plan, he argued, he would face a lifetime of indebtedness. Moreover, when the payment term ended, he would face massive tax liability for the amount of forgiven debt. The 15-year plan was also unacceptable, he maintained, because it would not allow him to save money for his retirement.

Bankruptcy Judge Thomas Catliota was not sympathetic. The judge applied the three-pronged Brunner test to determine whether Augustin's student debt constituted an undue hardship.  Under Judge Catliota's analysis, Augustin failed all three prongs.

First, Judge Catliota noted, Augustin could make monthly loan payments of $331 under the 25-year repayment plan while maintaining a minimal standard of living. Second, Augustin could not show additional circumstances that would make it impossible to make monthly payments in that amount.

Finally, Judge Catliota ruled, Augustin had not demonstrated good faith. Augustin had not made a single payment on his student loans for more than a quarter of a century. "By his own  admission,"the judge pointed out, "Mr. Agustin deferred his loans for approximately 26 years."

Moreover, Mr. Augustin was not willing to accept DOE's offer of a  manageable repayment plan. In Judge Catliota's view, "This shows lack of good faith on [Augustin's] part."

Not surprisingly then, Judge Catliota refused to discharge Mr. Augustin's student debt. Applying the three-part Brunner test, Augustine was not entitled to relief.

Perhaps Judge Catliota reached a just outcome in the Augustin case. But let's look at the case in a larger context. Why does the Department of Education loan people money for multiple college degrees and then permit borrowers to make no payments on those loans for 25 years?

Why does the government push people into 25-year repayment plans that allow debtors to make monthly payments so low that they don't cover accruing interest? Even if Mr. Augustin agrees to make income-based payments of $331 a month for 25 years, he will never pay back the $210,000 he owes.

Finally, why apply the Brunner test to people like Mr. Augustin? Why not simply ask whether Mr. Augustin and his wife will ever pay back $330,000 in student-loan debt? The answer is clearly no.

In short, Augustin v. Department of Education is another adventure in Fantasy Land, which is what the federal student-loan program has become. Our government has rigged an insane student-loan program that is trapping millions of people to a lifetime of indebtedness from which there is no relief.

References

Augustin v. U.S. Department of Education, 588 B.R. 141 (Bankr. D. Md. 2018).

Hopson v. Illinois Student Assistance Commission: A clueless bankruptcy judge sentences a 63-year-old student-loan borrower to a lifetime of indebtedness

 Janice Faye Hopson, 63 years old, went to trial in an Illinois bankruptcy court last spring, hoping to discharge more than $100,000 in student loans. The Illinois Student Assistance Commission and the U.S. Department of Education opposed her plea for relief; and Judge Jacqueline Cox, the bankruptcy judge who heard Hopson's case, ruled against her.

At the time of Judge Cox's ruling, Hopson was in a 25-year income-based repayment plan (IBRP) that required her to make monthly payments of zero due to her low income. Indeed, Judge Cox ruled that Hopson could maintain "a substantial standard of living" while making student-loan payments of zero dollars a month (588 B.R. 518).

Hopson argued that she would never pay back $100,000 in student loans under a 25-year IBRP and that the principal on the loan will continue to grow in the coming years due to accruing interest. When the 25-year plan ends, Hopson will likely be in her 80s. Moreover, although DOE will write off the amount of her unpaid debt when the 25-year repayment plan is completed, that amount will be taxable to her as income.

Judge Cox was unsympathetic. If Hopson is insolvent when her 25-year plan ends, Judge Cox pointed out, she can file for bankruptcy a third time and discharge her tax bill on the grounds that she is broke (588 B.R. at 515).

Will Ms. Hopson be insolvent when her IBRP ends two decades from now? Of course she will. At age 63, she has virtually no retirement savings (as Judge Cox acknowledged). Twenty years from now, she undoubtedly will be living entirely off her Social Security checks, estimated to be only $1430 a month.

Although Judge Cox probably did not realize it, she essentially ruled that no student debtor who is eligible for a long-term income-based repayment plan is entitled to bankruptcy relief. Of course it is true in one sense that a person allowed to make student-loan payments of zero dollars a month cannot claim her student loans constitute an "undue hardship" in the present moment. But people making token monthly payments or even monthly payments of zero are burdened by student-loan debt that grows with each passing month due to accruing interest and which will never be repaid.

They are also burdened by the specter of a huge tax bill when DOE eventually writes off their loans two decades or more into the future. Like Ms. Hopson, many people will be long past retirement age when their IBRP payment obligations come to an end. And like Ms. Hopson most people in IBRPs won't have sufficient retirement savings to live their last years in comfort and dignity.

*****

A few notes in closing. First, Judge Cox ruled that Ms. Hopson could maintain a "substantial standard of living" while making student-loan payments of zero dollars a month. Apparently, the judge concluded Hopson was living above a minimal lifestyle because she rented a two-bedroom apartment. Judge Cox pointed out Hopson could save $225 a month if she moved into a one-bedroom apartment.

Second, Adam Merrill, a Chicago lawyer, represented Ms. Hopson pro bono. I want to especially commend him for taking on Ms. Hopson's case without a fee.

Finally, Judge Cox did not state in her opinion when Ms. Hopson's 25-year repayment plan will end. Perhaps the date was not important to the judge.  In this essay I presumed that Hopson signed up for a 25-year repayment plan fairly recently and that it won't conclude until she is in her 80s.

Judge Jacqueline Cox: No mercy for a 63-year-old student-loan debtor

References

Hopson v. Illinois Student Assistance Commission, 588 B.R. 509 (Bankr. N.D. Ill. 2018).

Kinney v. National Collegiate Master Student Loan Trust: Iowa bankruptcy judge discharges student loans that a man cosigned for his niece (originally posted 2.08.2019)

 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.

Dicent v. Kaplan University: An unhappy student sues a for-profit university, but the Third Circuit forces her to arbitrate her claims (first posted on 4.20.2019)

 Maria Dicent enrolled in an online legal studies program at Kaplan University in 2014. She did not have a good experience. In 2017, she sued Kaplan in a federal court, accusing the for-profit university of making false claims and disseminating false advertisements.

According to Ms. Dicent, Kaplan lured her into enrolling in Kaplan's online program by using deceptive tactics. She said she had not been informed that she would need 180 hours to graduate, far more hours than a typical four-year degree program requires and that she had not been able to keep her eBooks, which she apparently paid to use. She also said Kaplan's financial aid office retaliated against her because she refused to allow her photo to be used to promote Kaplan.

Unfortunately for Ms. Dicent. she signed an arbitration agreement when she enrolled at Kaplan back in 2014. In that agreement, Dicent promised not to sue Kaplan and to arbitrate any claims she might have against the for-profit. She also agreed to waive her right to a jury trial.

Based on the arbitration agreement, a federal trial court threw out Dicent's suit and ordered her to arbitrate her clam. Dicent, who pursued her case without a lawyer, then appealed to the Third Circuit Court of Appeals, which sided with the trial court.

Dicent argued on appeal that she was not aware of the arbitration agreement, but the Third Circuit did not buy her argument. A clearly labeled Arbitration Agreement was included in Dicent's enrollment packet, the court noted; and Dicent admitted having signed the packet with an e-signature.

Dicent v. Kaplan University is an unfortunate decision. The Obama administration recognized that for-profit colleges were using arbitration agreements to prevent students from suing them for fraud or other misconduct. Obama's Department of Education adopted a regulation forbidding the for-profits from forcing their students to sign arbitration agreements.

 Betsy DeVos, President Trump's Secretary of Education, scuttled the Obama ruled shortly after taking office, but a federal court ordered her to implement it. In light of that ruling, Secretary DeVos released new guidance to the for-profit colleges, instructing them to drop enforcement of mandatory arbitration agreements.

In recent years, a few courts have invalidated arbitration agreements on various grounds. Some courts have labeled them adhesion contracts--agreements which a stronger party forces a weaker party to sign on unfavorable terms. Other courts have looked at the inherent unfairness in some of these agreements. For example, a California court refused to enforce an arbitration agreement that required California students to arbitrate their disputes against a medical-training school in Indiana.

Poor Ms. Dicent. Acting without an attorney, she was probably unaware of the legal arguments that can be made against arbitration agreements that for-profit colleges require students to sign as a condition of enrollment. She may not have known that the Obama administration recognized these agreements for what they are--a shyster tactic to protect for-profit colleges from being sued for fraud.

I feel quite certain that Ms. Dicent was telling the truth when she said she did not know about the mandatory arbitration agreement until Kaplan submitted it in district court. Almost all students sign long, turgid documents as a condition of enrollment, and most of them sign without reading. What would be the point? When students enroll at a for-profit college, they are enrolling on the college's terms, and they realize they have no power to negotiate.

What is so bad about arbitration agreements? First of all, the complaining party is usually required to pay half the arbitrator's fees, so arbitration may be more expensive for the student than a lawsuit. Second, arbitration agreements often bar students from banding together to file class actions suits, which is virtually the only way students can obtain justice against the well-funded for-profits with their battalions of lawyers.

Finally, it is well known that arbitration generally favors the corporate party. That is why banks, financial-services institutions, and for-profit colleges force their customers to sign them. The arbitrators know they will see a defrauded student only once, but they will see the corporate party again and again. If they get a reputation for siding with the underdog, the corporations won't choose them to arbitrate their disputes.

The for-profits know they will repeatedly be accused of defrauding their students. The best way to deal with this constant threat is to get the students to promise not to sue before allowing them to enroll. Then when students get defrauded--as many of them will--there will be damn little they can do about it.

References

Dicent v. Kaplan University, Civil Action No. 3:17-cv-01488 (M.D. Pa. June 15, 2018), aff,d No-18-2982 (3d Cir. Jan. 3, 2019).

Dicent v. Kaplan University, WL 158083, No-18-2982 (3d Cir. Jan. 3, 2019) (unpublished opinion).

Kreighbaum, Andrew (2019, March 18).  DeVos Tells Colleges to Drop Arbitration Agreements, Inside Higher Ed.

American Bar Association v. U.S. Department of Education: DOE Acted Capriciously in Denying Public Service Loan Forgiveness to Three Public Service Lawyers

 On February 22, 2019, Judge Timothy Kelly issued an important opinion in America Bar Association v. U.S. Department of Education. The American Bar Association (ABA), suing for itself and four public-service attorneys, accused the Department of Education (DOE) of violating fundamental principles of administrative law when it ruled that the public-service lawyers were ineligible to participate in the Public Service Loan Forgiveness program (PSLF), a student-loan repayment program designed to provide student-loan debt relief to people who work in public service jobs. ABA also argued that DOE acted wrongly when it ruled that the ABA is not a public-service organization eligible to participate in the PSLF program.

In a lengthy decision, Judge Kelly ruled against the ABA regarding its own claims. The ABA has no legal rights under the Public Service Loan Forgiveness statute, Judge Kelly determined; and therefore the Department’s conclusion that the ABA did not constitute a qualified public-service employer had no legal consequences. But Judge Kelly concluded that DOE had violated the rights of three public-service attorneys when it ruled they were ineligible for PSLF participation. 

More than one million Americans have applied for PSLF eligibility; and in initial screenings, about 75 percent of the applicants were certified as PSLF eligible due to the nature of their public service jobs. Later, however, when DOE began processing requests for PSLF debt relief, it denied 99 percent of them. In American Bar Association v. U.S. Department of Education, Judge Kelly ruled that DOE had acted “arbitrarily and capriciously” toward three public-service lawyers when it changed the eligibility standards for the PSLF program and later ruled the three lawyers were ineligible to participate. Judge Kelly’s decision has enormous implications for student-loan debtors who are relying on the PSLF program to help them deal with their federal student loans.

ABA v. U.S. Department of Education: a summary of Judge Kelly’s decision

In 2016, the American Bar Association brought suit against DOE over its handling of the PSLF. In its complaint, ABA argued that the Department had violated ABA’s rights when it ruled that ABA was not an approved public-service organization entitled to participate in PSLF. ABA also sued on behalf of four public-service lawyers who had been declared ineligible for PSLF participation by DOE.

All four attorneys in ABA’s lawsuit carried significant amounts of student-loan indebtedness. Michelle Quintero-Millan graduated from University of Denver’s law school. Her student-loan burden had grown from $340,000 when she initially began repayment to more than $430,000 due to accrued interest.

Geoffrey Burkhart graduated from DePaul University College of Law in 2008 and went to work for ABA as Attorney and Project Director for Legal Services. Burkhart’s student indebtedness had grown from $155,899 in 2009 to over $200,000 in 2017, even though he had been making regular student-loan payments.

Kate Voigt graduated from Boston College Law School and began working for the American Immigration Lawyers Association, an organization that provides legal services for immigrants. Her debt had grown from $205,546 when she first graduated to more than $247,000.

Jamie Rudert, a 2010 graduate of American University Washington College of Law, worked for Vietnam Veterans for America, where he represented veterans with disability claims. He estimated that his student-loan debt had grown from about $135,000 when he graduated to $161,985 by May 2017.

All four lawyers took public-service jobs in the belief that their jobs qualified them to participate in PSLF. ABA argued that DOE had violated the Administrative Procedure Act when it changed its definition of public service employment, and it also argued that the Department had violated due process by reversing course without giving the attorneys proper notice.

DOE defended its actions with a variety of arguments. First, DOE argued that its decisions concerning PSLF eligibility were not were not “final agency actions,” and thus ABA’s lawsuit was premature. But Judge Kelly rejected this argument as mere “nonsense.” It was clear, Judge Kelly observed, that the four lawyers faced growing debt burdens and had “structured their careers and long-term financial plans around their eligibility for the PSLF program.” Thus, Judge Kelly wrote, “DOE’s ruling obviously had an ‘immediate’ and ‘significant’ impact on their ability to plan their careers and finances.”

DOE rejected two attorneys’ PSLF claims based on the agency’s “Primary Purpose” standard. In essence, DOE said that Quintero-Milan and Burkhart were not qualified for PSLF because ABA--their employer--was not an organization that offered public services as its primary purpose. DOE maintained that the Primary Purpose standard had always been in place, and that the original determination that Quintero-Milan and Burkhart’s qualified for PSLF had been an error.

But Judge Kelly rejected that argument. The record was clear, Judge Kelly ruled, that DOE had changed its certification standard when it adopted the Primary Purpose rule and that it had done so without complying with the Administrative Procedure Act.

DOE ruled that Voight was ineligible for PSLF participation under its “School-Like Setting” standard. Voight, DOE maintained, had offered educational services, but she had not done so in a school-like setting. DOE also argued that it had applied the school-like-setting standard consistently over the years.

Again, Judge Kelly disagreed. The evidence was all-but-conclusive, Kelly ruled, that DOE adopted this standard after it had informed Voight that her job was PSLF qualified but before it reversed itself and told her she was ineligible.

Thus, Judge Kelly concluded, with regard to three of the plaintiff attorneys--Quintero-Milan, Burkhart, and Voight—DOE had changed its position concerning PSLF eligibility to their detriment without engaging in the reasoned decisionmaking process required by the Administrative Procedure Act. Therefore, all three lawyers were entitled to summary judgment on their claims against DOE.

In summary, Judge Kelly ruled that DOE’s decisions must be set aside if they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. DOE, by changing the way it determined PSLF eligibility in violation of the procedural requirements of the Administrative Procedure Act, had violated the rights of Quintero-Milan, Burkhart, and Voight. Accordingly, Judge Kelly vacated DOE’s Primary Purpose and School-Like Setting standards along with the denial letters DOE had sent to Quintero-Millan, Burkhart, and Voight, and remanded their PSLF applications back to DOE for reconsideration in light of Judge Kelly’s opinion.

Conclusion

Judge Kelly’s ruling is one of at least 63 federal court decisions that have ruled against the Trump administration over the past two years. As the Washington Post reported, plaintiffs accused the Trump administration of violating the Administrative Procedure Act in two-thirds of these cases; and it was this violation that constituted the heart of Judge Kelly’s decision.

American Bar Association v. U.S. Department of Education is an important decision for three public-service attorneys, and it could have enormous implications for other individuals in public-service jobs who are relying on the PSLF program to manage their college loans. As discussed earlier, DOE denied 99 percent of the applications for PSLF loan forgiveness it had processed as of September 2018, including applications filed by people who had previously been told by DOE’s servicing agent that they were PSLF eligible. Judge Kelly’s ruling has the potential to force DOE to reverse thousands of those denials and reprocess them in harmony with Judge Kelly’s conclusion that DOE had changed the rules for determining which student-loan borrowers qualified for PSLF in violation of the Administrative Procedure Act.

 References

American Bar Association v. U.S. Department of Education, Civil Action No. 16-2476 (D.D.C. Feb. 22, 2019).

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.

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).

Weingarten v. DeVos: AFT accuses the Dep't of Educ. of mismanaging the Public Service Loan Forgiveness program (originally posted on July 16, 2019)

 Last week, Randi Weingarten and the American Federation of Teachers (AFT) sued Education Secretary Betsy DeVos and the U.S. Department of Education, accusing DOE of mismanaging the Public Service Loan Forgiveness program (PSLF). AFT sued on behalf of itself and eight educators whose applications for public-service loan forgiveness were denied. 

Weingarten is president of AFT and she sued the Department of Education in her official capacity as an AFT officer. In a call to reporters, Weingarten was highly critical of DOE's handling of the PSLF program. “This program was not supposed to be negotiable or debatable," Weingarten told reporters.  "It is a right under [the] law. It shouldn’t be a crapshoot, but under Betsy DeVos, that is exactly what it’s become." 

PSLF was enacted by Congress in 2007 to aid student-loan borrowers who desired to enter public service occupations but were deterred by their burdensome student loans. Under the program, student-loan borrowers in qualified public-service jobs who make 120 monthly payments in approved federal loan programs are entitled to have their remaining student-loan debt forgiven. 

The first PSLF participants became eligible for student-loan forgiveness in the fall of 2017, after having made 120 student-loan payments over the previous ten years. When they applied for loan forgiveness, however, DOE denied 99 percent of the applications. Most PSLF loan-forgiveness applications were denied on the grounds that the applicants were not eligible to participate even though their loan servicers had assured them they were eligible.

Why is AFT interested in the way DOE is managing the PSLF program? 

AFT represents 1.7 million teachers and public-service professionals, and many AFT members are hoping to obtain student-loan relief under PSLF. In a survey of its members, AFT learned that 82% of AFT members who had submitted PSLF applications were denied. Many applicants were denied for failing to meet eligibility requirements due to misinformation provided by their loan servicer. 

According to AFT's lawsuit, DOE disregarded repeated misrepresentations by its student-loan servicers that student-loan borrowers were qualified for PSLF loan forgiveness. 

Those servicers misinformed [AFT members] that they were “on track” for PSLF and making “qualifying” payments for PSLF, even though they did not actually have qualifying loans or were not in qualifying repayment plans. Only years later, after they had made 120 payments and applied for forgiveness, did these public servants learn for the first time that their payments did not count. Had the loan servicers given these Plaintiffs the correct information, they easily could have consolidated their loans, entered qualifying repayment plans, and been eligible for forgiveness under PSLF. 

AFT is suing under two primary legal theories. First, AFT argues that DOE violated the Administrative Procedure Act in the way it handled PSLF loan-forgiveness applications. Second, AFT accuses DOE of violating due process under the Fifth Amendment to the U.S. Constitution. 

In some ways, AFT's lawsuit is similar to the one filed by the American Bar Association (ABA) against the Department of Education in 2016. The ABA accused DOE of wrongly denying ABA the right to participate in the PSLF program. It also sued on behalf of four public-service lawyers whose applications for PSLF loan forgiveness were denied.

Judge Timothy Kelly ruled on the ABA lawsuit last February and the ABA won a partial victory. Judge Kelly ruled that the ABA had no legal right to be recognized as a qualified participant in the PSLF program. On the other hand, Judge Kelly ruled that DOE violated the Administrative Procedure Act when it denied PSLF loan-forgiveness applications by three of the lawyer-plaintiffs in the ABA's lawsuit. In Judge Kelly's view, DOE had acted arbitrarily and capriciously in handling the lawyers' PSLF applications. Judge Kelly ordered DOE to reconsider the lawyer's PSLF applications in accordance with his opinion. 

Judge Kelly elected to rule in the ABA lawyers' favor based solely on Administrative Procedure Act violations and did not consider the ABA's due process claims.  Now AFT is raising a constitutional due process claim in its own case. 

Why are these developments important to the 45 million people who have outstanding student loans? 

PSLF  an important avenue of relief for people who are heavily burdened by student loans and can't pay them back. If these individuals work in approved public-service jobs for ten years and make 120 payments on their student loans, they are entitled to have their remaining loan balances forgiven. 

Thus, the Trump administration's decision to deny PSLF eligibility to 99 percent of applicants is alarming. If AFT prevails in its lawsuit, that victory could pave the way for PSLF relief for millions of other Americans working in public-service jobs.

*****

Note: The individual plaintiffs in AFT's lawsuit are: Cynthia Miller, Crystal Adams, Connie Wakefield, Deborah Baker, Janelle Menzel, Kelly Finlaw, Gloria Nolan, and Michael Giambona.

Thomas v. U.S. Department of Education: 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).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

Crocker v. Navient Solutions: A small win for student-loan debtors

 Crocker v. Navient Solutions, a recent Fifth Circuit decision, is a small win for student-loan debtors. Essentially, the Fifth Circuit ruled that a private student loan obtained to pay for a bar review course is dischargeable in bankruptcy. (The opinion also includes extensive analysis on a jurisdictional issue, which will not be discussed here.)

Brian Crocker took out a $15,000 loan from Sallie Mae to pay for his bar-examination prep course. Subsequently, Crocker filed for bankruptcy and his  Sallie Mae loan was discharged.

Navient Solutions, which assumed the legal right to collect on Crocker's debt, continued trying to collect on the $15,000 loan after Crocker's bankruptcy discharge, claiming the debt was not dischargeable in bankruptcy. In August 2016, Crocker filed an adversary proceeding against Navient in the same bankruptcy court where he had obtained his bankruptcy discharge. Crocker sought a declaratory judgment that his Sallie Mae loan had been discharged and a judgment against Navient, holding it in contempt for continuing its collection efforts after Crocker's bankruptcy discharge.

A Texas bankruptcy court ruled in Crocker's favor, and Navient appealed.  The Fifth Circuit identified three types of student debt that are not dischargeable in bankruptcy without a showing of undue hardship:

• Student loans made, insured, or guaranteed by a governmental unit (11 U.S.C. § 523(a) (8) (i)), including federal student loans.

• Private student loans to attend a qualified institution (11. U.S.C. § 523 (a) (8) (B)). 

• Debt arising from "an obligation to repay funds received as an educational benefit, scholarship, or stipend" (11 U.S.C. § 523 (a) (8) (ii)).

Sallie Mae's loan to Crocker was not a governmental loan, so § 523 (a) (8) (i) did not apply. Navient conceded that the loan was not made to a qualify institution, and thus § 523 (a) (8) (B) did not apply.

Instead, Navient argued that the loan was nondischargeable under § 523(a) (ii). Navient maintained that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act made all private student loans nondischargeable, including Sallie Mae's $15,000 loan to Crocker to pay for his bar-exam prep course.

The Fifth Circuit disagreed. The court pointed out that the statutory provision Navient relied on did not mention loans at all. Instead that provision "applies only to educational payments that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions  of the payments."

Therefore, the court ruled, "The loans at issue here, though obtained in order to pay expenses of education, do not qualify as 'an obligation to repay funds received as an educational benefit, scholarship, or stipend' because their repayment was unconditional. They therefor are dischargeable."

As Steve Sather, a Texas bankruptcy lawyer, observed in a recent blog essay, the Crocker decision is only a small victory for student-loan debtors. It is nevertheless a significant decision because it is a reminder that not all private student loans are covered by the Bankruptcy Code's "undue hardship" provision.  Private loans taken out by law school graduates to pay for bar-examination preparation courses can be discharged in bankruptcy.

References

Crocker v. Navient Solutions, __ F.3d __, 2019 WL 5304619 (5th Cir. Oct. 22. 2019).

Steve Sather. Fifth Circuit Grants Small Victories to Student Loan Debtors, A Texas Bankruptcy Lawyer's Blog, October 26 2019, http://stevesathersbankruptcynews.blogspot.com/2019/10/fifth-circuit-grants-small-victories-to.html.

Lozada v. ECMC: Bankruptcy court is not required to consider a student-loan debtor's religious giving in its "undue hardship" analysi

 In 2017, Rafael Lozada, age 67, filed an adversary proceeding in a New York bankruptcy court, seeking to discharge more than one-third of a million dollars in student-loan debt. Lozada acquired part of this debt for his own education expenses and part from a Parent Plus loan he took out to pay for his son's education. Lozada's debt accrued interest at an annual rate of 8.25 percent--about $27,000 a year.

Bankruptcy Judge Mary Kay Vyskocil refused to discharge Lozada's student loans, ruling that he had failed to pass the undue hardship test established by the Second Circuit's Brunner decision. In particular, Judge Vyskocil declined to take Lozada's religious contributions into account when determining whether he could maintain a minimal standard of living while making payments on his student loans.

As Judge Vyskocil noted, Lozada's religious giving was considerable. Together, Lozada and his wife had made religious contributions totally more than $20,000 a year over the four-year period of 2013-2016.

Judge Vyskocil found Lozada's commitment to charity laudable, but she "concluded that 'when [Lozada] elects to tithe rather than pay his nondischargeable debt, he is making donations using someone else's money."

In her ruling, Judge Vyskocil pointed out that Lozada and his wife received a monthly net income of $5,942 a month. After paying reasonable household expenses (not including religious contributions), Lozada enjoyed "a healthy monthly surplus" of $1,443 a month.

This surplus, Judge Vyskocil reasoned, allowed Lozada to make religious contributions of $600 a month (approximately 10 percent of his net monthly income) and still have enough money to make monthly student-loan payments of $826 a month under an  Income Contingent Repayment Plan (ICRP).

Lozada appealed Judge Vyskocil's decision to a U.S. District Court, where Judge Alvin Hellerstein affirmed the lower court's decision. In Judge Hellerstein's view, requiring Lozada to make student-loan payments under an ICRP would not constitute an undue hardship. Moreover, the judge ruled, Lozada failed the "good faith" element of the Brunner test. Indeed, Judge Hellerstein observed, Lozada's "excess charitable contributions, reaching 35 percent of his household income, coupled with a failure to consider contributing to his student loans, undermines any inference of good faith."

It is hard to argue with Judge Hellerstein's analysis in the Lozada case. Clearly, Lozada's household income was adequate for him and his wife to make charitable contributions equal to 10 percent of their household income and still make income-based student-loan payments under an ICRP.

Nevertheless, the Lozada case illustrates the insanity of the federal student loan program. It makes no sense whatsoever for the federal government to structure the federal student loan program in such a way that a 67-year-old person can amass student-loan debt amounting to a third of a million dollars, a debt that accrues interest at the rate of more than $2,000 a month.

Furthermore, it is insane to force a man who is past retirement age to commit to a 25-year, income-contingent repayment plan that allows him to make monthly payments that are less than half the amount of accruing interest.  By the time Lozada finishes his loan obligations, he will be 92 years old, and he will owe considerably more than he owes now--certainly more than half a million dollars.

No wonder that the Democrats' siren call for massive student-loan forgiveness is so appealing to many Americans. And why not forgive billions of dollars of student debt? After, all millions of student debtors will never pay back their loans, whether or not those loans are forgiven.

Image credit: Celebrating Financial Freedom

References

In re Lozada, 604 B.R. 427 (S.D.N.Y. 2019).

Lozada v. Educational Credit Management Corporation, 594 B.R. 212 (Bankr. S.D.N.Y. 2018), aff'd, 604 B.R. 427 (S.D.N.Y. 2019).

Lord Abbett Affiliated v. Navient Corporation: "We cheat the other guy and pass the savings on to you!"

More than a year ago, Lord Abbett Affiliated Funds sued Navient Corporation for fraud and securities violations, claiming it was deceived by Navient's representations about its student loan portfolio. Navient is a student-loan servicing company that manages about $300 billion in student-loan debt owed by 12 million borrowers.

According to Lord Abbett's second amended complaint (80 pages long), Navient "regularly and indiscriminately" granted forbearances to struggling student-loan borrowers, allowing those borrowers to temporarily stop making monthly loan payments Lord Abbett alleged that Navient did this in order to artificially report high income and to hide the fact that Navient was a riskier investment than it was portraying itself (para. 5).

"By overusing forbearances," Lord Abbett represented, "Navient artificially kept delinquencies, defaults, and charge-offs lower than they should have been, which in turned allowed [Navient] to report artificially low loan loss provisions as well as correspondingly high net incomes and EPS [earnings per share]" (para. 7).

Navient's practice of misusing forbearances, Lord Abbett argued, enabled Navient to list thousands of loans as current (para. 38), even though those loans weren't performing. Lord Abbett maintains that Navient's fraudulent practices, once disclosed, caused its stock price to fall. Undoubtedly, Lord Abbett and other investors lost a ton of money when Navient stock nosedived.


As I said, Lord Abbett's amended complaint was filed more than a year ago and its lawsuit may no longer be active. Navient's stock has declined in value from its high and is now worth less than $9 per share. In fact, one investment analyst recently recommended loading up on Navient's stock, which pays a nice dividend.


Personally, I don't give a fig whether Lord Abbett and its investors lost money in Navient stock. After all, Lord Abbett apparently didn't care about Navient's nefarious practices so long as it was making money. It's as if Navient was making that old used-car dealer pitch: "We cheat the other guy and pass the savings on to you!"

Lord Abbott's complaint, however, is strong evidence that Navient's reckless practice of granting forbearances to distressed student borrowers obscures the number of people who are not paying back their student loans. According to Lord Abbett (para 47), Navient granted four consecutive forbearances to more than half a million student-loan borrowers over a five-year period, allowing borrowers to skip their monthly loan payments while interest accrued and capitalized on their loans.

How many of these half million borrowers will ever pay off their individual student loans? I venture to say none of them will.

References

Lord Abbett Affiliated Fund v. Navient Corporation, Case No. 1-16-cv-112-GMS, Second Amended Complaint filed November 17, 2017 (D. Del.).

Here's Why You Should Buy Navient (NAVI) Right Now. Nasdaq.com, June 27, 2018).