Do I Have to Include My Tax Return in My Adversary Proceeding?

Question:

I am currently pursuing an adversary proceeding on student loans against the DOE, and Navient. I am a single father, and it appears they will argue at trial that they are entitled to my tax returns to use to pay towards my student loans.

Do you know of any case law that says a tax return does not have to be used/taken in an adversary proceeding (trial) for student loans or that I should be allowed to keep my tax returns?

Rodger

Answer:

Rodger,

Unfortunately, the Department of Education can garnish federal income tax returns, Social Security checks, and even your paycheck to collect on a defaulted student loan. I think your best tactic is to argue at trial that forcing you to pay back your student loans will create an “undue hardship” for you.

All but one federal circuit court have adopted the Brunner test to determine undue hardship. That test has three parts:

  1. You cannot maintain a minimal standard of living if you are required to pay back your loan.
  2. Your financial circumstances are not likely to improve over the lifetime of your payment obligation.
  3. You handled your student loans in good faith.

The Department of Education or the loan service company (ECMC, Great Lakes, Navient, etc.) almost always argues that the student-loan debtor doesn’t meet the Brunner test, And DOE has a long list of cases that it cites to support its position.

However, over the years, some bankruptcy judges have issued decisions that favor student-loan debtors. Unfortunately, most student debtors don’t know about these cases and are at a disadvantage when arguing their cases before a bankruptcy judge.

For example, DOE or the loan servicer will undoubtedly argue that you should sign up for a 25-year, income-based repayment plan and that such a program is not an undue hardship. Some courts buy that argument. But others have not, reasoning that such plans create long-term stress and anxiety, damage the debtor’s credit rating, interfere with getting a fresh start, and have serious tax consequences since forgiven debt is considered taxable income. At least one court has recognized the strain on marital life that comes with a 25-year, unpayable debt.

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DOE and Navient also typically argue that the debtor is not living frugally, has unnecessary expenses, and could pay something on the student loans if he or she would only cut out cable television, drive an older car, quit eating out a McDonald’s, or quit contributing to a retirement program.

Again some courts buy those arguments, but there are several decisions in which the court is sympathetic to the debtor. These courts say that living a frugal lifestyle does not require a debtor to give up the simple pleasures of life, like a little entertainment. And some have said a modest contribution to a retirement account is appropriate.

Finally, DOE will argue that the debtor did not handle his or her loan obligations in good faith. In several cases, however, a court has ruled that the debtor demonstrated good faith by attempting to maximize his income and by living frugally–even when the debtor made no student-loan payments. Roth v. ECMC (B.A.P 9th Cir. 2013) and Krieger v. ECMC are seminal cases.

In Roth, the debtor was in her late sixties and living on a Social Security check of less than $800 a month. The court said that putting her in an IBRP was pointless and that the law would not require a person to perform a useless act. In Krieger, the 7th Circuit gave a discharge to a woman who had lived with an elderly parent for several years and who had applied unsuccessfully for numerous jobs. The court refused to force her into an IBRP.

In my view, the essential thing a student-loan debtor wants to get a judge to understand is that a 25-year, income-based repayment plan is inappropriate. Alerting the judge to the favorable case law is critical.

I am writing as a professor, not a licensed attorney, so I cannot give you legal advice. But I think a trial brief that educates the bankruptcy judge about favorable case law is critical.

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Take care,

Richard Fossey

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.


Damon Day - Pro Debt Coach

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