On July 29, 2015 the National Consumer Law Center (NCLC) and National Association of Bankruptcy Attorneys (NACBA) jointly filed a court document arguing a position in support of discharging student loans through the bankruptcy laws. Much thanks to the readers and tipster who slipped me the document.
The matter of dealing with overwhelming student loan debt through bankruptcy has been a favorite topic of mine over the past few years. Read all my past articles, here.
The way many people, including bankruptcy attorneys, perceive the law is that it is impossible to discharge federal and private student loans through bankruptcy. That is not a fair broad statement that can be made. In some cases, like these, it is clear the total amount of student loan debt or large portions of it are instantly dischargeable when people think it is not possible.
A hat tip is owed to Jason Iuliano, who took a lot of heat for his research of bankruptcy discharge cases.
But even though student loans have been discharged, the interpretation of what makes a student loan eligible for elimination in bankruptcy has been haphazardly applied across the country. Even the Department of Education tried to provide some clarity to current laws in this document to make it easier to eliminate in bankruptcy.
Without a fair standard for determining if student loans can be discharged in bankruptcy we are left with two issues; 1) inequity in the application of the law/standard, 2) abandoning people in debtor slavery with no legal way to deal with their debt. That’s frankly, unconstitutional. Bankruptcy exists for a much needed reason and it is the law of the land.
In the appeal for Robert Murphy versus Educational Credit Management Corporation (ECMC) and Sallie Mae both NCLC and NACBA presented facts why the current way bankruptcy courts treat student loan debt should change. It is a long and well researched document as only these two excellent organizations can deliver.
Here is the summary of their mutual positions, “The undue hardship tests of other circuit courts were developed at a time when debtors sought an immediate discharge of student loans in bankruptcy without waiting five or seven years for an automatic discharge the law then provided.
Today, borrowers who are seeking discharge of student loans are not jumping the gun on a future automatic discharge. On the contrary, many have already been burdened by the obligations for decades and, if denied a discharge, face a lifetime of crushing debt.
Other changes to bankruptcy law and student loan programs suggest that this Court should not be restrained by decisions from other circuits that gave undue weight to concerns that are not pertinent today.
Rather than adopt one existing test over another, we urge this Court to provide a formulation of the undue hardship standard in simple terms, that restricts consideration of extraneous and inappropriate factors not consistent with the statutory language. A finding about whether a debtor’s hardship is likely to persist should be based on hard facts, not conjecture and unsubstantiated optimism. Hardship should be assessed based on the debtor’s ability to repay student loans based on the loan terms, not twenty-five years into the future under an administrative income-based repayment plan. Consideration of the debtor’s good faith, past conduct and life choices simply has no place in an undue hardship determination and if permitted, results in unnecessary litigation and value-laden, inconsistent judgments.”
Those are all valid and real issues that need to be dealt with.
We live in an interesting moment in this situation. The Department of Education has put forward documentation that tells servicers to not object to many requests for bankruptcy discharge. Companies like ECMC seem to be disregarding that directive and pushing back hard. The cynic in me might say the fact ECMC is now the owner of a chain of universities that make money through pushing student loans is not inconsequential and has an influence in their frequent appeal of cases where the court rules the loans are discharged.
The current standard used to determine if student loans are eligible for a discharge is the Brunner test. This is an approach that was developed through a court case in 1987 to address the availability of student loan discharge in cases where people were suffering under an undue financial hardship. And let’s not forget this was also implemented at a time when private student loans were still eligible for a bankruptcy discharge through a normal bankruptcy. It wasn’t until 2005 when President Bush signed into law bankruptcy reform which made private student loans not dischargeable like other debt.
The NCLC and NACBA brief provides some excellent context about how the Brunner test was developed.
“The harshness of the Brunner test understandably can be seen as a reaction to this concern about impetuous filings, as demonstrated by facts of the Brunner case itself. Ms. Brunner filed bankruptcy approximately seven months after receiving her Master’s degree, and sought to discharge her student loans two months later when they came due. Like all other debtors at the time, Ms. Brunner could have simply waited five years before filing bankruptcy and her student loans would have been discharged. This helps explain why the Brunner court and those following Brunner added a “good faith” prong to the test despite the lack of any textual basis for it in.”
Clearly that is not the standard by which most student loan debtors should be held. The overwhelming majority of people who contact me for help and parent, grandparents, and students who have labored for years to try to manage and exploding level of student loan debt. This debt is preventing all involved in having any chance of saving for retirement, meeting obligations, living a safe life, and improving the economy through consumption. Some people buried in student loan debt are killing themselves with now perceived way out.
NCLC and NACBA go on to say, “Amici submit that most debtors today, like Mr. Murphy, are not seeking an undue hardship discharge soon after their student loans come due. A recent empirical study that considered the demographic characteristics of debtors who seek undue hardship discharges found that the mean age of those in the sample was 49 and the median age was 48.5. See Iuliano, Jason, “An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard.”
The concern of Congress and courts adopting the Brunner test, that debtors seeking a bankruptcy discharge soon after graduating college or ending their studies, is simply no longer relevant.
The early undue hardship cases also reflected a concern about the financial stability of loan programs, particularly when a bankruptcy discharge was sought before the government had an opportunity to collect on the debt.
Not only are debtors now seeking discharges long after loans have been made, but the government has been provided extraordinary collection tools that did not exist during the Brunner era.
In 1991, the Higher Education Act was amended to permit a borrower’s wages to be garnished to collect defaulted student loans in an administrative proceeding, without obtaining a court judgment.
A Department of Treasury procedure also can be used to collect student loans through the offset of tax refunds.
The Debt Collection Improvement Act of 1996 expanded these collection efforts by permitting the offset of Social Security of other government benefits.
In 1991, the then-existing six-year statute of limitations for filing collection actions against borrowers, and all other limitation periods for student loan collection, were eliminated. Collection lawsuits, tax intercepts, wage garnishments, and government benefit offsets may be done at any time. The only end point is that collection must cease when a borrower dies.
The possibility of debtors avoiding collection during periods when they have an ability to repay their student loans, before seeking a bankruptcy discharge, is another factor not relevant today.”
The Brunner test may have served its purpose in a different time, but it is now obsolete and should not be adopted by this Court.
The brief makes an obvious point those who have been looking at this topic have observed, the irregularity of what an undue hardship is for discharge. Excellent examples are provided of how, even the government, applies the definition of this critical phrase, with inconsistency to the detriment of student loan debtors.
NCLC and NACBA make the point that Brunner test inconsistencies and arbitrary interpretation lead to forcing already disadvantaged consumers to file adversary proceeding (additional court actions) when they are already down and out. There should be a more consistent standard to determine discharge, they argue.
That new standard should be based on on basic question, “Can the debtor now, and in the foreseeable near future, maintain a reasonable, minimal standard of living for the debtor and the debtor’s dependents and still afford to make payments on the debtor’s student loans?”
That certainly seems like a reasonable question at the heart of student loan debt discharge eligibility. As it stands now the courts, Sallie Mae, and ECMC have made all sorts of assumptions about what the future will look like for debtors. Sometimes it seems like everyone but the debtor thinks a leprechaun might appear in the future with a pot of gold at the end of a rainbow so the debt should not be reduced or eliminated.
I’ve seen cases where ECMC and Sallie Mae have actually said student loan debt should not be discharged because the debtor has a cell phone, cable television, or is contributing to mandatory retirement programs with the government. I’m hear to tell you, cutting out a cell phone is not going to make a dent in $175,000 in student loan debt for a basic graphic arts degree. And let’s not loose sight that the majority of people with student loan debt never graduated and don’t have the advantage of a future higher income.
NCLC and NACBA present a point of view that the Court already has a consistent standard to use. “The bankruptcy court’s analysis in In re Ivory, 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001), serves as useful example of this approach. The court listed what it considered to be the elements of a minimal standard of living. These include decent shelter and utilities, communication services, food and personal hygiene products, vehicles (maintained, insured, and tagged), health insurance or the ability to pay for medical and dental expenses when they arise, some small amount of life insurance, and some funds for recreation. When a borrower’s monthly income falls hundreds of dollars below the level at which the debtor could afford to pay for these necessities, courts need not consider arguments over much smaller expenditures for items such as cable television and Internet access. The basic purpose of this inquiry is to ensure that, after debtors have first provided for their basic needs, they do not allocate discretionary income to the detriment of the student loan creditor.”
As it stands now, one part of the Brunner test which student loan holders fall back into asking the Court to use to not discharge the loans is the “good faith” standard. The brief makes an excellent observation, “It has morphed into a morality test in which a myriad of the debtor’s life choices and past conduct are called into question. Permitting consideration of “good faith” or “other relevant facts and circumstances” has forced debtors to refute arguments by student loan creditors that they should have avoided having too many children (In re Walker, 406 B.R. 840, 863 (Bankr. D. Minn. 2009); Ivory, 269 B.R. at 911)); should not take prescription drugs to counteract the side effects of mental health medication (In re Renville, 2006 Bankr. LEXIS 3211 (Bankr. D. Mont. Jan. 5, 2006)); should not have taken custody of two grandchildren, one of whom was victim of physical abuse (In re Mitcham, 293 B.R. 138 (Bankr. N.D. Ohio 2003)); or should not have ended studies without getting a degree so as to care for elderly parents (In re Bene, 474 B.R. 56 (Bankr. W.D. N.Y. 2012)).”
And many of the argument I’ve read where ECMC, Sallie Mae, and others have claimed needlessly prevent someone from have made a good faith effort to repay their debt are as equally ridiculous.
Another fallback position of ECMC, Sallie Mae, and others has been that income based repayment programs are available for student loan repayment so no discharge should be granted. But that that leaves the debtor having to comply with a future 25 years of recertification and compliance with current program terms for income based payments. And as it stands now, at the end of the 25 years the debt would be forgiven and present a future need for bankruptcy due to a potential huge tax bill due from the forgiven debt. But let’s not forget, Congress can change that program and it might go away, but leaving people stranded in income based programs is exceedingly dangerous as I wrote about in Why Income Based Student Loan Payments Can Be a Terrible Trap.
The NCLC and NACBA position is the possibility for a reduced loan payment in the next year should not matter. “In considering whether now and in the foreseeable near future the debtor can maintain a reasonable standard of living and at the same time afford to make payments on the student loan, a critical issue any court must address is: what are the student loan “payments” that form the basis for this evaluation? Both Brunner and the totality test require that a court evaluate the hardship the debtor is likely to incur if the debtor actually makes payments due on the loan. Neither of these standards assesses “hardship” based on the debtor’s making no payments at all. The ICRP argument that ECMC formulated in Mr. Murphy’s case cannot be squared with either of the prevailing undue hardship standards.
In determining the appropriate monthly payment amount for the undue hardship assessment, the appropriate place to begin is with Congress’s enactment of the operative Code provision in 1978. There were no income-based payment programs in 1978. Congress could not have intended that courts evaluate undue hardship using payment figures derived from programs that did not exist at the time.
Given the clear, absolute five-year discharge option that existed in 1978, any type of long-term repayment program running for twenty-five years would have been irrelevant to the undue hardship determination as envisioned by Congress at the time. Congress has not revisited the undue hardship standard since 1978.
The initial version of the ICRP was developed in 1993. After Congress removed the time-based automatic bankruptcy discharge option in 1998, the undue hardship standard was left as the only discharge option.
The legislative history indicates that in 1998 Congress was aware that the long-term payment plans and other options could serve as fallbacks for borrowers who did not qualify for an undue hardship discharge. However, Congress did not repeal the bankruptcy hardship provision; indeed, it expressly stated that it did not intend that these new payment alternatives should displace or in any way change the undue hardship standard drafted into the Code in 1978.
According to the relevant 1998 Conference Report addressing the elimination of the time-based automatic discharge,” [t]he conferees note that this change does not affect the current provisions allowing any student borrower to discharge a student loan during bankruptcy if they can prove undue economic hardship.”
Finally, among the substantial revisions to the Code made in 2005, Congress added § 523(a)(8)(b) to extend the nondischargeability exception to cover private student loans. Here again, Congress did not alter the 1978 language related to the discharge for undue hardship. By this time, the income-based plans had been available for more than a decade.
When Congress created the undue hardship discharge option in 1978, there was no ambiguity about what it meant to make payments on a student loan. As is the case today, students typically executed notes with a fixed repayment period. As is true today, this period was usually ten years.
In creating the undue hardship discharge option, Congress clearly referred to the hardship caused by making the payment needed to pay off the loan within the original ten-year amortization period. See Bene, 474 B.R. at 73 (opining that today Second Circuit would not define relevant repayment period by reference to long term payment plans); Polleys, 356 F.3d at 1310 (under Brunner, “inquiry into future circumstances should be limited to the foreseeable future, at most over term of the loan”).
Today, just as in 1978, courts must evaluate hardship based on the impact that making payments due under the original note terms will have upon the debtor.”
This position of leaving student loan debtors lingering in potential income driven repayment programs for up to 25 years is crazy considering that IRS tax liabilities can be currently discharged in bankruptcy after just a few years.
Rather than removing a debt burden, the income-based programs almost invariably increase the burden.
I have to admit I do love the position in the brief about the problems created by income driven repayment programs. Points I touched on in my article. Enrollment in these plans can explode the amount of debt. As NCLC and NACBA say, “Doubling of the indebtedness under a long-term plan, as would occur in Mr. Murphy’s case, is not unusual. This is the opposite of a “fresh start.”
In re Dufresne, 341 B.R. 391 (Bankr. D. Mass. 2006); In re Brooks, 406 B.R. 382, 393 (Bankr. D Minn. 2009). Rather than rebuilding credit, the debtor’s credit may be poisoned for life. This has a drastic impact not only on the individual’s future access to credit, but also on employment opportunities and access to housing. In re Strand, 298 B.R. 367, 376 (Bankr. D. Minn. 2003).
Decades of mounting indebtedness impose a substantial emotional burden on a person as well. In re Barrett, 337 B.R. 896, 903-904 (B.A.P. 6th Cir. 2006), aff’d 487 F.3d 353 (6th Cir. 2007); In re Marshall, 430 B.R. 809, 815 (Bankr. S.D. Ohio 2010). The bankruptcy discharge provides clear relief from this burden. The long-term plans offer no certainty of relief. Instead, they present a highly speculative option that may provide no relief at all.”
They go on to say, “Borrowers only obtain a forgiveness of debt if they adhere rigorously to all requirements of an income-based program for its full twenty to twenty-five year duration.
Borrowers who default while in a program lose eligibility. 34 C.F.R. §§ 685.221(a)(2), 685.209(a)(ii), 682.215(a)(2). Re-defaults can occur because the income-based plans do not take expenses into account. The formulas that set payments based solely on income do not look at medical expenses, high housing costs, or expenses for any short-term emergency the borrower may encounter.
For twenty to twenty-five years a borrower is one accident away from permanently losing the “discharge” ostensibly available under a long-term repayment plan. Borrowers may also lose eligibility due to paperwork snafus that can occur during the decades of recertification procedures required to maintain participation. 34 C.F.R. §§ 685.209(a)(5)(iii), 685.221(e)(3).
Once in default under a plan, the borrower can lose eligibility to participate in another income-based plan. Defaults under plans can be irreparable because the options for removing a loan from default (consolidation, rehabilitation) may be one-time only or (like rehabilitation) burdensome. In sum, it is a mistake to treat commencement of a long-term repayment plan as equivalent to completion of one.”
And they touch on the tax bomb as well, “Discharge of a debt in bankruptcy is not a taxable event. However, forgiveness of a student loan debt at the end of an ICRP or IBR is taxable. 26 U.S.C. § 61(a)(12). Brondson, 435 B.R. at 802. This tax debt is generally not dischargeable in bankruptcy. 11 U.S.C. § 523(a)(1). Therefore, successful completion of a long-term plan may simply see the Internal Revenue Service replace the Department of Education as the powerful creditor pursuing the borrower for several more decades.”
I urge everyone to read the full brief filed by NCLC and NACBA and to use it as reference in their fight.
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