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).