A student loan servicing company’s failure, over the course of five years, to respond to an adversary complaint and multiple court orders, justified a finding of contempt and sanctions against the servicer requiring it to pay off the debtor’s student loans to the DOE in the amount of $354,629.62, and pay damages to the debtor in the amount of $24,000. Leary v. Great Lakes Educational Loan Services, No. 15-11583, Adv. Proc. No. 15-1295 (Bankr. S.D.N.Y. Sept. 8, 2020).
10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit
An educational benefit is not a student loan for nondischargeability purposes under section 523(a)(8)(A)(ii). McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug. 31, 2020).
When the debtors filed their chapter 13 petition, they had many outstanding student loans including six private educational loans held by Navient totaling approximately $107,000 (the Loan). The trustee objected to confirmation of the plan citing its failure to provide for nondischargeable student loans. The debtors filed an amended plan specifically to correct certain inaccuracies not related to student loans. They also added the provision that “[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until end of plan.” The plan defined unsecured Class Four claims as “[a]llowed unsecured claims not otherwise referred to in the Plan.” Navient agreed that class four claims were dischargeable. [Read more…] about 10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit
Loan to Refinance Student Loan Need Not Be Educational Loan to be Nondischargeable
A debt incurred when a debtor refinances a student loan through a non-institutional lender may be nondischargeable in bankruptcy without regard to whether the debt itself constituted a qualified educational loan. Juber v. Conklin (In re Conklin), No. 19-91 (W.D. N.C. Apr. 6, 2020).
The debtor, Lina Conklin, financed her college education, in part, through private student loans. After she graduated, Ms. Conklin became engaged to the creditors’ son, Christopher Juber. At that time, she owed over $100,000 in private student loans at an interest rate of 9.5%. In an effort to assist the as-yet-unmarried couple financially, Christopher Juber’s parents, Kevin and Linda Juber, paid off Ms. Conklin’s student loans using their home equity line of credit (HELOC) at an interest rate of 1.99%. In exchange, Ms. Conklin orally agreed to make biweekly payments to the Jubers in the amount of $500, and, when the Jubers sold their home, Ms. Conklin agreed that she and their son would refinance the remaining principal on the HELOC loan. When Ms. Conklin later broke off her engagement with their son, the Jubers and Ms. Conklin entered into a promissory note under which Ms. Conklin agreed to repay the loan over ten years at 9.5% interest. [Read more…] about Loan to Refinance Student Loan Need Not Be Educational Loan to be Nondischargeable
Bankruptcy Court May Not Enforce Discharge Order from Other District
On direct interlocutory appeal, the Fifth Circuit found that courts may not use their contempt powers to enforce discharge orders issued by other courts outside their judicial districts. The court also held that the private student loans at issue were not subject to section 523(a)(8)(A)(ii)’s nondischargeability provision because that provision applies only to educational benefits where, as in the case of grants or scholarships, the obligation to repay is conditional. Crocker v. Navient Solutions LLC, No. 18-20254 (5th Cir. Oct. 22, 2019). [Read more…] about Bankruptcy Court May Not Enforce Discharge Order from Other District
Bankruptcy Court Gets Undue Hardship Right on Remand
The Bankruptcy Court for the District of Massachusetts applied the totality-of-the-circumstances test to find that the Chapter 7 debtor was entitled to have her student loans discharged in bankruptcy notwithstanding the fact that she had substantial exempt equity in her home. Schatz v. U.S. Dept. of Ed., No. 14-30825, Adv. Proc. No. 15-3001 (Bankr. D. Mass. Oct. 2, 2019).
When the debtor, Audrey Schatz, was in her fifties she attempted to improve her earning potential by attending law school, for which she incurred $106,000 in student loans. After becoming a lawyer, however, she was unable to find satisfactory employment and was earning approximately $25,000 when she filed for bankruptcy. The bankruptcy court rejected her position that the student loan debt caused her undue hardship and found that the loans were nondischargeable under section 523(a)(8). [Read more…] about Bankruptcy Court Gets Undue Hardship Right on Remand
5th Circuit Finds No Room for Sympathy for Student Loan Debtor
In an exercise in disingenuous hand-wringing, the Fifth Circuit essentially acknowledged that its application of the Brunner test eviscerates the undue hardship avenue to discharge of student debts. In so holding, the court affirmed the denial of discharge and sent the debtor packing to perform, if not the impossible, at least the highly improbable task of finding employment. Thomas v. Dept. of Educ., No. 18-11091(5th Cir. July 30, 2019).
Vera Thomas worked at a call center for eight years at just over $11/hour when, in 2014, she developed diabetic neuropathy causing her to take numerous unpaid work days and incur extensive medical expenses. When the call center was sold in 2016, she lost her job for “company policy violations” and moved to Texas. From 2016 to 2017, Ms. Thomas acquired and lost three jobs—Whataburger, Perfumania and UPS—due to her diabetic neuropathy and consequent inability to stand for any length of time. By the time she filed chapter 7 bankruptcy, she was in her 60s and living off public assistance and private charity. Her monthly expenses were over three times her monthly income. After obtaining her bankruptcy discharge, Ms. Thomas sought to have her student loans discharged. The bankruptcy court, noting that in fifteen years on the bench it had never granted undue discharge of student loans, found that Ms. Thomas did not meet the standard for undue hardship discharge. The district court affirmed.
[Read more…] about 5th Circuit Finds No Room for Sympathy for Student Loan DebtorAccrued Interest on Student Loan Discharged as Undue Hardship
A Kansas bankruptcy court did not err in granting the debtor a discharge of the accrued interest on her student loans where she met the Tenth Circuit’s flexible version of the Brunner test, and the court has equitable power to grant less than a complete discharge. ECMC v. Metz, No. 18-1281 (May 2, 2019).
The debtor, age 59, was never in default on her student loans. Though she was continuously employed over the repayment period, the amount she owed grew over time from the original loan amount of $16,613.73 to $67,277.88. Beginning in 2001, she filed three Chapter 13 bankruptcies and made all payments under her plans, receiving a discharge in the first two. In the third and current bankruptcy, the debtor sought to discharge her consolidated student loan. The bankruptcy court found undue hardship but discharged only the accrued interest on the debt. The student loan creditor, ECMC, appealed. The debtor filed a cross-appeal seeking to have the entire debt discharged. NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor. [Read more…] about Accrued Interest on Student Loan Discharged as Undue Hardship
Court Orders Student Loan Discharge
In a compassionate and pragmatic opinion, a bankruptcy court in the Northern District of Georgia found that the debtor met the difficult burden of showing a “certainty of hopelessness,” and that she otherwise satisfied the Bruner test for a hardship discharge of her student loans. Hill v. Educ. Credit Mgmt. Corp., No. 17-56656, Adv. Proc. No. 17-5131 (Bankr. N.D. Ga. April 1, 2019).
Chapter 7 debtor, 46-year-old, Risa Rozella Hill, attended college intermittently between 1998 and 2011, for a social work degree. During that time, she accumulated the 23 student loans owed to ECMC which were the subject of this adversary proceeding. She never made any payments on the loans because, at all times, they were either in forbearance or deferment. Prior to trial, ECMC voluntarily reduced her debt from $127,000 to $70,000.
Ms. Hill was employed as a social worker from 2002 to 2013 when she began experiencing signs of psychosis including hallucinations, delusions and voices in her head. Her illness led to hospitalizations and a period of homelessness. She was diagnosed with “Bipolar Type I disorder with psychotic features and post-traumatic stress disorder (“PTSD”),” and was found to be depressed and dangerous to herself and others. She became dependent upon numerous medications with significant side-effects, and a host of medical and counseling professionals to regulate her mental illness. After the onset of her illness, Ms. Hill was no longer able to work and she began receiving Social Security Disability Insurance Benefits as her sole source of income. She obtained housing using a Housing Voucher through the Atlanta Housing Authority, received food stamps until she failed to fill out the forms to continue that benefit, and had Medicare for her medical expenses. A Representative Payee received her SSDI and paid her bills for her. In her bankruptcy schedules she listed excess income in the amount of $212.00 per month for unexpected expenses.
She sought discharge of the student loans as undue hardship under section 523(a)(8).
ECMC suggested, among other things, that rather than discharge, she enter an income-based repayment plan, “Revised Pay as You Earn” or REPAYE, under which she would pay nothing so long as she maintained the yearly recertification of her income, and her debt would be cancelled at the end of 20 years. Ms. Hill, however, feared that she would not be able to maintain the recertifications and the loans would go into default possibly leading to set-off of her disability benefits.
Applying the Bruner test for undue hardship, court began by looking at whether paying the student loans would prevent Ms. Hill from maintaining a minimal standard of living. There was no dispute that Ms. Hill could not pay her loans out of her surplus income even with the lowered amount determined by the ECMC. ECMC argued, however, that because she would pay nothing in the REPAYE program, she could not meet this first Bruner requirement. The court turned this argument on its head finding that the fact that under the REPAYE program Ms. Hill would pay nothing is simply further evidence of her inability to repay the loans. Furthermore, “[r]equiring Debtor’s participation in such a program will do nothing but impose an ongoing administrative burden on Debtor and create possible tax implications that may arise after the debt is cancelled subsequent to the repayment period.” Her SSDI benefits would also be at risk if, at the end of the twenty-year REPAYE program, she could not satisfy those tax requirements. The fact that Ms. Hill had recently failed to fill out the paperwork for her food stamp benefits and had earlier failed to follow through with the paperwork for an administrative discharge, was evidence that the administrative burden inherent in maintaining the REPAYE program would overwhelm her.
Importantly, the court went on to explain that the Bruner test required a finding that the debtor would not be able to maintain a minimal standard of living if she paid off the original loans, not loans subject to an income-based repayment plan. The court noted that a contrary finding would essentially put undue hardship discharge out of reach for student loan debtors in general.
The court turned to the second prong of the Bruner test. The Eleventh Circuit applies an onerous “certainty of hopelessness” to the question of whether the cause of a debtor’s inability to pay her student loans will persist. The court found that Ms. Hill met that test. Despite some progress in her treatment for PTSD, her other mental illnesses were unlikely to abate, and her need for medication with debilitating side-effects would prevent gainful employment into the foreseeable future. The court noted that Ms. Hill’s eligibility for SSDI was based on a finding of the persistent nature of her illnesses.
The court added that even if Ms. Hill were able to work at the income level she enjoyed prior to the onset of her illnesses, she would not earn enough money to pay off the loans and meet her daily needs. Moreover, employment would mean loss of SSDI, her housing voucher, Medicaid and other benefits that currently allow her to receive the treatment necessary to prevent further psychotic episodes. The court thus found her situation “hopeless.”
Finally, the court addressed whether Ms. Hill had made a good faith effort to repay her loans. ECMC argued that because Ms. Hill had never made any payments on her loans, nor had she taken advantage of the REPAYE program, she has not demonstrated good faith. The court disagreed based on the facts that at no time were Ms. Hill’s loans in default, and she was in school all but two of the years the loans were outstanding. Because Ms. Hill was never financially able to make payments on the loans, the fact that she did not do so does not constitute bad faith. Again, the court cautioned that a finding of bad faith based on failure to participate in an income-based repayment plan would graft a regulatory requirement onto section 523(a)(8) that Congress did not include in the provision.
The court was also unpersuaded by ECMC’s argument that the fact that her student loans comprised a disproportionate percentage of her debt in bankruptcy was an indication of bad faith. To the contrary, the court found Ms. Hill saddled with substantial non-educational debts that would have justified filing for bankruptcy in and of themselves.
The court thus found that Ms. Hill met the standard of undue hardship necessary to discharge of her student loans under section 523(a)(8).
Attorney Fee Award Upheld Against Student Loan Servicer
The district court found that the bankruptcy court did not abuse its discretion in holding the student loan servicer in contempt for failing to apply the student debtor’s payments outside the plan in accordance with pre-petition payments as required by the debtor’s confirmed chapter 13 plan. Penn. Higher Educ. Assistance Agency v. Berry, No. 18-444 (D. S.C. March 5, 2019).
Berry had student loans issued by the Department of Education (DOE) and administered by the Pennsylvania Higher Education Assistance Agency (PHEAA). She was paying off her loans under an Income-Driven Repayment plan (IDR) and a Public Service Loan Forgiveness (PSLF) program. In her chapter 13 bankruptcy, her confirmed amended plan provided for continued payments on her student loan debts outside the plan with those payments being applied exactly as before thereby allowing her to continue to benefit from the IDR and PSLF. The PHEAA, however, put the loans into administrative forbearance under which it applied the payments to principal and interest. Ms. Berry filed a Motion to Enforce seeking sanctions in the amount of $22,317.30, representing the attorney fees she incurred pursuing proper application of the payments. The DOE eventually settled its portion of the action for $6,000 and Ms. Berry sought the remaining amount from PHEAA. The bankruptcy court granted Ms. Berry’s entire attorney fee request consisting of $22,317.30 of which, after the DOE’s $6,000 settlement, the PHEAA owed $16,317.30.
On appeal, the district court began with PHEAA’s defense that it was limited in its authority by its servicing contract with the DOE. The court found that the bankruptcy court did not commit clear error in its application of law or in its findings of fact when it concluded that PHEAA had a contractual obligation to deal with borrower’s complaints and to bring unresolved problems to the attention of the DOE. In this case, it did neither.
The district court turned to the bankruptcy court’s conclusion that bad faith was not necessary to imposition of sanctions under section 105(a), reciting the necessary elements of contempt as: “(1) The existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) . . . that the decree was in the movant’s ‘favor’; (3) . . . that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) . . . that [the] movant suffered harm as a result.” Here, even if PHEAA lacked authority to treat Ms. Berry’s payments as provided for in her plan, the bankruptcy court did not err in finding that it could not simply ignore the confirmed plan. At the very least, it should have sought guidance from the DOE, or objected to the plan.
Along the same lines, PHEAA argued that the bankruptcy court abused its discretion by holding it in contempt where its conduct was governed by its contract with the DOE and was therefore not willful. The court found that the bankruptcy court’s authority to impose sanctions under section 105(a) did not require a finding of willfulness.
The court found that the bankruptcy court correctly based its decision on its broad authority to craft a remedy based on the particular circumstances of a given case and that, here, the bankruptcy court was persuaded by PHEAA’s failure to make any attempt to either comply with the debtor’s plan or seek guidance from the DOE. This finding was not an abuse of discretion.
Finally, the district court affirmed the bankruptcy court’s allocation of sanctions as having been based on the debtor’s efforts to obtain compliance from PHEAA.
Debtors’ Plan May Direct Student Loan Payments to Principal
Finding that “non-dischargeability does not immunize the student loan claim from modification,” the bankruptcy court confirmed the Chapter 12 debtors’ plan under which their payments would go to the principal on their student loan debt with accumulated post-petition interest to be paid post-discharge. In re Duensing, No. 18-10201 (Bankr. D. Kans. Feb. 22, 2019).
ECMC objected to Kirk and Eve Duensing’s proposed treatment of Ms. Duensing’s student loan debt arguing that, because the reduction of principal would result in declining post-petition interest, the proposed plan effectively discharged her student loan without a finding of undue hardship. [Read more…] about Debtors’ Plan May Direct Student Loan Payments to Principal