Times are changing when it comes to being able to discharge student loans in bankruptcy. And while the road has been paved by a few who have been successful, one 2013 case decided by the U.S. Appeals Court in the Ninth Circuit seems like it gives hope to those who want to discharge their student loans through bankruptcy.
The Ninth Circuit is huge. With a population of about 62 million people it covers Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon, and Washington.
Mike Hedlund, a Willamette University law school graduate fought a ten year battle to get his student loan lender to discharge his student loan. The lender, Pennsylvania Higher Education Assistance Agency and The Educational Resources Institute, fought Hedland aggressively to prevent a precedent setting ruling in favor of a consumer. Other smart bankruptcy attorneys in the Ninth Circuit might use this case to help support the discharge or significant reduction of student loans in upcoming cases.
While Hedlund did attend law school his dreams of becoming a lawyer never materialized.
Hedlund was born in Klamath Falls, Oregon and attended the University of Oregon where he obtained a bachelor’s degree in business administration. A couple of years after graduation he went to law school and took out a series of Stafford student loans.
The first loan was from TERI, The Educational Resources Institute and the rest were held by Pennsylvania Higher Education Assistance Agency.
He graduated in the middle of his law school class in May of 1987, prepared for the bar exam, took the exam in July of 1977 (sic) and failed while he was working as an intern for the district attorney’s office. Sat for the exam again in February of 1998 and failed it again. At that time the district attorney’s office terminated his employment.
He then got a job working for the juvenile department as a probation officer and prepared to take the bar exam a third time in 1999, and we know the circumstances of that, he prepared, he spent the money, he did the study, he drove to Salem the night before and then the mishap and he did not make it to the exam.
According to other reports the mishap on the third attempt at the bar that kept him from the test was that he accidentally locked his keys in his car.
In 2000, Hedlund married and became a father. He decided “the expense to take time off of work and to spent the money to take the bar review course again with no assurance of passing was not warranted given his family situation at that time.”
Following a series of attempts to pay on his student loans, a period of deferment or forbearance, and an attempt to consolidate the loans; the loans became unmanageable.
In January of 2002, PHEAA began to garnish Hedlund’s wages. TERI also garnished Hedlund’s bank account.
TERI eventually settled and agreed to accept $50 a month towards the student loans while PHEAA continued to push the case forward.
PHEAA was owed quite a bit more than TERI. The debt was somewhere in the $85,000 range plus about $3,600 a year in accruing interest.
According to testimony presented Hedlund was earning a good wage for the Klamath Falls area in his position as a probation officer for the juvenile department.
Hedlund’s family situation sounds very typical:
With regard to the family income, Mr. Hedlund testified that his wife works part time one day a week at a flower shop, $8.50 an hour and they utilized babysitting from his parents and grandparents to allow her to do that, and that she could probably work more than one day a week and not materially increase their babysitting expenses, and I think that’s a good summary of the testimony.
He has one vehicle, 14-year-old Ford Bronco, good to have in Klamath Falls 4-wheel drive, but has 150,000 miles and not one that he considers to be reliable transportation. It’s less than a mile — or a little over a mile from his home to work and that is a decent vehicle for him to get to and from work, but felt that it was reasonably necessary for the family to have a reliable vehicle so they leased a Honda Accord, certainly not a luxury vehicle by anybody’s imagination, payments $353 a month. That they use — his wife uses for transportation to around town and they use for their vacations when they have some time that they can take off.
So the monthly expenses — the monthly income at the time was $2,449, monthly expenses for $2,500, a $1 deficiency to meet expenses or just about to break even.
At the time there was discussion of nonessential expenses such as cell phones, cable TV, Internet access and a gym membership which were paid — which were part of the $2,400 — excuse me, $2,450.
They live in a small duplex owned by Mr. Hedlund’s parents and their rent of $350 a month is lower than market subsidized by the parent’s to allow them to have a little nicer place to stay, a little bit bigger, but they do anticipate having additional children and that it’s reasonably anticipated that that rent expense is going to increase in the years to come. – Source
So want Hedulund’s situation ended up being was a law school graduate who was very close to maximizing his income in a rural county in Oregon with a public job that pays him very well, and yet with that he could not make that full payment to PHEAA which he anticipated he would be able to do if he were practicing as a lawyer.
As expected the student loan lender fought hard to not allow a discharge or partial discharge of the debt. The attorney for PHEAA said, “As you know a lot of Courts attempted to pursue undue hardship and find undue hardship in order to get at a partial discharge, and that’s a tendency that has to be resisted, and it has to be resisted in this case because the debtor has to meet each and every one of the prongs in order to first find undue hardship and so, you know, we can understand why Judge Radcliffe may have gone to accept the Debtor’s argument.”
But Hedlund had done what he could to make his student loan payments. He had made a good faith effort to pay, maintained a basic standard of living and was unable to earn enough to meet the minimum payments demanded.
The student loan attorney argued Hedlund could try harder to make more money to pay the student loans. “He could have taken the bar exam again, and nothing stopped him from taking another bar exam that — and still doesn’t, he still has the ability to take the bar exam. The fact that he, you know, put up his hands and said, you know, no more, out of frustration and bitterness, understandable.”
While the student loan lender saw the situation as one is which Hedlund could have worked harder or done more to repay his student loans, another perspective was that Hedlund had found himself in a situation beyond his control, was making the best of his life, and maximizing his current income given his circumstances.
“I consider that to be a message of hope, and contrary to Mr. Monson’s view that it’s more important that he pay the loan then that he be in some form indentured, I would say I think it’s more important that people have hope and that they work hard and that they try to maximize the amount they can pay their creditors, and I think Mr. Hedlund has done that here with Judge Radcliffe’s help,” Said Mr Boyd, one of the attorneys in the case.
When the case made it to the U.S. Court of Appeals for the Ninth Circuit the court found the bankruptcy court award of a partial discharge in Hedlund’s case was appropriate.
What makes this case so compelling is while the bankruptcy court in this case did award a partial discharge of the student loan debt, the district court had reinstated the full debt as non-dischargeable. But on appeal the partial discharge was said to be appropriate.
The Appeals Court said, “He settled with TERI before trial, agreeing to pay down $17,718.15 at a rate of $50 per month. In other pretrial negotiations, PHEAA offered three potential repayment plans “if the Loans [were] determined not to be dischargeable . . . .”
All three options called for payment of the entire loan balance over the course of 30 years. The first option called for monthly payments of approximately $420; the remaining options began with monthly payments of $307 and rose to $430 and $440 respectively. Hedlund did not, and has not, pursued any of these options.
After trial, the bankruptcy court granted a partial discharge of all but $30,000 of the PHEAA debt.”
Applying the three-factor Brunner test, Judge Brandt found that: (1) Hedlund could not have maintained a minimal standard of living, if required to repay the full loans; (2) “additional circumstances” indicated that Hedlund’s inability to repay his loans would persist into the future; and (3) Hedlund had made good faith efforts to repay his loans.
Student loan obligations are presumptively nondischargeable in bankruptcy absent a showing of “undue hardship.” 11 U.S.C. § 523(a)(8). To determine if a debtor has shown undue hardship, we follow the three-part test from Brunner. See In re Pena, 155 F.3d at 1111–12. Under Brunner, the debtor must prove that: (1) he cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if required to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans.
Educ. Credit Mgmt. Corp. v. Mason (In re Mason), 464 F.3d 878, 882 (9th Cir. 2006). “[T]he burden of proving undue hardship is on the debtor, and the debtor must prove all three elements before discharge can be granted.” Rifino v. United States (In re Rifino), 245 F.3d 1083, 1087–88 (9th Cir. 2001). – Source
So what is this “Good Faith” effort the courts keep talking about? “Good faith is measured by the debtor’s efforts to obtain employment, maximize income, and minimize expenses.” Penn. Higher Educ. Assistance Agency v. Birrane (In re Birrane), 287 B.R. 490, 499 (B.A.P. 9th Cir. 2002) (internal quotation marks and citation omitted). “Courts will also consider a debtor’s effort – or lack thereof – to negotiate a repayment plan, although a history of making or not making payments is, by itself, not dispositive.”
The court also “held that Hedlund was justified in refusing to obligate himself “into his mid-60s” when his children would likely be seeking to attend college.”
The Appeals Court upheld the partial discharge awarded by the bankruptcy court. And while the loans were not fully eliminated, they were substantially reduced to a level that was reasonably affordable to the consumer.
This should be viewed as a victory for people who are simply looking for a fair and balanced approach to dealing with their student loan debt when they have tried all available options to meet the demanded payments.
Natalie Scott, a Eugene lawyer who represented Hedlund, said lawyers for the loan agency suggested that forgiving most of Hedlund’s loans would “open the flood gates” to healthy college graduates claiming they couldn’t earn enough and demanding their loans be forgiven. – Source
Big hat tip to reader Kevin who supplied information for this article.