Katy Stech Ferek published an article in Wall Street Journal in which she reported that bankruptcy judges are becoming more sympathetic to debtors seeking to discharge their student loans in bankruptcy. Is Ferek correct?
I once would have thought so. Until recently, I believed the bankruptcy courts were becoming more compassionate toward bankrupt student debtors. But now I am not so sure.
Without question there have been some heartening developments in the federal bankruptcy courts over the past few years. At the appellate level, the Ninth Circuit Bankruptcy Appellate Panel discharged student loans owed by Janet Roth, an elderly student-loan debtor who was living on a monthly Social Security check of less than $800. Judge Jim Pappas, in a concurring opinion, argued sensibly that the courts should abandon the harsh Brunner test for determining when a debtor can discharge student loans under the Bankruptcy Code’s “undue hardship” standard.
The Seventh Circuit, in its Krieger decision, discharged student debt of a woman in her fifties on undue hardship grounds, in spite of the fact that she had not enrolled in an income-based repayment plan. The court agreed with the bankruptcy court that Krieger’s situation was hopeless. This too was a heartening decision for distressed student debtors.
Fern v. Fedloan Servicing, decided in 2017 is another good decision. In that case, the Eighth Circuit Bankruptcy Appellate Panel affirmed bankruptcy relief for a single mother, specifically noting the psychological stress experienced by debtors who know they will never pay off their student loans.
And there have been several good decisions in the lower courts. The Abney case out of Missouri, the Lamento case out of Ohio, the Myhre decision, and a handful of other recent decisions, were compassionate rulings in favor of down-on-their-luck student debtors.
But a few warm days do not a summer make. Thus far, no federal appellate court has explicitly overruled the draconian Brunner test for determining when a student loan constitutes an undue hardship.
And there have been some shockingly harsh rulings against student debtors. In Butler v. Educational Credit Management Corporation, decided in 2016, a bankruptcy judge refused to discharge Brenda Butler’s student debt, which had doubled in the twenty years since she had graduated from college, in spite of the fact she was unemployed and the judge had explicitly stated that she had handled her student loans in good faith. The judge ruled Butler should stay in a 25-year repayment plan that would end in 2037, more than forty years after she graduated from college!
Moreover, there simply have not been enough recently published bankruptcy-court rulings to constitute a trend. As Ferek reported in her article, federal judges in student-loan bankruptcy cases had only ruled 16 times in 2017, and student loans were canceled in only three of those cases.
Even favorable rulings do not look quite so encouraging when examined closely. Ferek mentioned the Murray case out of Kansas, in which a bankruptcy judge granted a partial discharge of a married couple’s student-loan debts. This was a favorable ruling, but Educational Credit Management Corporation, the federal government’s most ruthless debt collector, appealed. Fortunately for the Murrays, they were represented by an able Kansas lawyer; and the National Association of Consumer Bankruptcy Attorneys, joined by the National Consumer Law Center, filed an amicus brief on the Murrays’ behalf. The Murrays prevailed on appeal, but most student-loan debtors do not have the legal resources the Murrays had.
Ferek wrote a useful article, and I hope distressed student-loan debtors read it and are encouraged. Nevertheless, the fact remains that very few insolvent college-loan borrowers get bankruptcy relief from their crushing student loans. And those who have the courage to seek relief in the bankruptcy courts often have a long road to travel. Michael Hedlund, a law school graduate who won partial relief from his student debt in a Ninth Circuit ruling, litigated with his creditor for 10 years!
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