Quick Answer: Student loan bankruptcy is extremely difficult but possible in rare cases, as shown by Seth Koeut who earned an MD from Ponce School of Medicine but couldn’t obtain a U.S. medical residency despite five years of trying. The case highlights risks of federal loans for foreign medical schools given limited U.S. residency opportunities.
Seth Koeut was born in Cambodia and came to the United States as a child. Like many immigrants, he applied himself energetically to obtain a better life. He graduated 6th in his high school class and went on to earn two bachelor’s degrees from Duke University.
Mr. Koeut then went to medical school and received an MD from Ponce School of Medicine in Puerto Rico. Somewhere along the way, he learned to speak English, Cambodian, Spanish, French, and Italian.
Although he passed his Medical Board exams, Koeut could not obtain a residency, which is a prerequisite to obtaining a medical license. After applying for residencies for five years, he gave up hope of becoming a licensed physician in the United States.
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[Editor Note: The issue with foreign-trained medical students being able to find a U.S. based residency program are a factor many never consider. See this. The situation gets worse when people are approved for U.S. federal student loans at out of country medical schools, as in this case. The Department of Education seems to make no decision to not provide access to expensive foreign medical schools even though we know the chances of obtaining a U.S. based medical residency to complete the training are a very big risk.]
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Over the years, Koeut held various jobs, including sales clerk at Banana Republic, a dishwasher at a Mexican restaurant, and parking lot signaler.
Finally, Koeut filed for bankruptcy and asked Bankruptcy Juge Margaret Mann to discharge his student-loan debt, which totaled $440,000. A vocational evaluation expert assessed Koeut’s job prospects and said Koeut would need additional training to meet his employment potential.
The U.S. Department of Education (DOE) opposed Koeut’s application for a student-loan discharge and argued that he should be put in a long-term, income-based repayment plan (IBR). DOE also said Koeut failed to reach his employment potential because of a lack of initiative.
But Judge Mann disagreed. “A medical school graduate who works as a parking attendant and dishwasher cannot be described as lazy,” she observed. She approved of Koeut’s decision not to sign up for an IBR, which he rejected “because he could not carry the burden of his student debt without harming his opportunities for advancement.”
The Judge also noted, “The court finds Koeut has given his best effort to maximize his earning potential to date, but will not achieve his maximum salary, if at all, without a partial discharge of nearly all his student loans. Koeut will also need ten years of additional experience and retraining before this can occur. The court also finds that Koeut’s reasons for rejecting the IBR are sound since he justifiably believes an IBR will continue to depress his credit score and hinder his employment opportunities and financial stability. Even if Koeut eventually maximizes his potential, his salary will still be insufficient to enable him to make any more than minimal payments on his student loans. Since Koeut cannot in good faith be expected to pay more than he will ever afford without suffering an undue hardship, the student loan balance he cannot pay will be discharged and he will be required to pay the rest.”
In the end, Judge Mann discharged almost all of Koeut’s student debt, finding that his current income and expenses did not permit him to maintain a minimum standard of living–even without making loan payments.
The Koeut case may be a sign that the bankruptcy judges are weary of DOE’s incessant demands to put distressed student-loan debtors into IBRs. And perhaps they have grown tired of DOE’s insistence that every bankrupt debtor’s financial distress is entirely the debtor’s fault.
Indeed, one cannot read Judge Mann’s opinion without concluding that Seth Koeut had done everything possible to improve his standard of living and had handled his massive student-loan debt in good faith. Let us hope for more bankruptcy court decisions like Koeut v. U.S. Department of Education.
References
Koeut v. U.S. Department of Education, 622 B.R. 72 (Bankr. S.D. Cal. 2020).
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Just to clarify that all four medical schools in Puerto Rico are accredited by the Association of American Medical College’s Liaison Committee on Medical Education.