43-Year-Old Mom Wins Partial Discharge of Federal Student Loan Debt

My friend and fellow student loan informationalist, Wm. Richard Fossey, emailed me to share a recent undue hardship victory which I want to discuss this week. The case was decided on May 3rd, 2016, in the U.S. Bankruptcy Court in the District of Idaho. The link to the full context of the decision is here: http://business-finance-restructuring.weil.com/wp-content/uploads/2016/05/McDowell-5-4-2016.pdf

The plaintiff, a 43 year old twice divorced mother of a 23 year old and a 15 year old, proved undue hardship under the three-pronged Brunner Test. The plaintiff passed the first prong in spite of having a seemingly modest income and being employed, because her monthly expenses were consistently higher than her monthly income, which satisfied prong one which requires: “Based on current income and expenses, the Debtor cannot maintain a minimal standard of living if forced to repay the student loans”.

Prong two of Brunner requires “additional circumstances,indicating that the first prong circumstances will persist through a significant portion of the loan repayment period” in this case the additional circumstances involved the plaintiff’s health, and a large portion of the case summary by Judge Pappas was spent on discussing the testimony of a number of Doctor’s regarding the health conditions of the plaintiff.

The defendants here, the Department of Education and ECMC (Educational Credit Management Corp.) went to the level of bringing in “expert witnesses” (a Doctor paid to examine and then testify) to challenge the testimony of the plaintiff’s doctors (plural – due to her difficult to diagnose conditions).

In spite of the challenge to disprove the plaintiff’s “additional circumstances” Judge Pappas found for the plaintiff in prong two. Pappas summed up prong two this way: “the opinions offered by the experts leads the Court to find that Plaintiff’s medical issues are indeed serious and likely of a permanent nature. Because of that, Plaintiff’s medical and other expenses are likely to remain elevated, and her earnings capacity will likely remain limited.

With two of the Brunner prongs satisfied, the third prong “a demonstration of good faith” or as stated in Brunner: “The debtor has made good faith efforts to repay the loan” , was the final step requiring passage. Here the court’s examination of the plaintiffs “good faith” resulted in opening the door for “a partial discharge”.

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Judge Pappas agreed with the plaintiff’s claims “that she has acted in good faith in this case by trying to maximize, or at least to maintain her income, as well as by endeavoring to minimize her expenses”. However, ECMC argued that some of the financial decisions made by the plaintiff demonstrated lack of good faith. ECMC pointing out expenditures the plaintiff made for an overseas trip (for which she had borrowed money from her mother), and the purchase of a $10,000 motorcycle for one of her ex-husbands’.

In the end, Judge Pappas concluded that although the plaintiff “occasionally made bad financial choices (those) should not disqualify her from securing relief”… Yet based on the fact that the plaintiff’s lack of financial discipline may have consumed $10,000 that would have otherwise been available to pay on her loans, Judge Pappas moved to not allow a full discharge of the total loan amount.


While Judge Pappas ruled in favor of the plaintiff’s proof of the three prongs of the Brunner Test, he made the decision to grant a partial discharge, stating: “the Code accommodates situations like this one. The discharge of student loans is not an all or nothing proposition”.

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Pappas based his decision on precedent case law within Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168, 1173 (9th Cir. 2003), and Jorgensen, 479 B.R. at 86, along with Bossardet v. Educ. Credit Mgmt. Corp. (In re Bossardet), 336 B.R. 451, 457 (Bankr. D. Ariz. 2005).

Daniel Gill, writer for the Bankruptcy Law Reporter, summarized the decision very well by writing: “Rather than use these improper spending instances as examples of bad faith, the court exercised its inherent powers of equity and carved out such expenditures from the amount of student loans it would order to be dischargeable. Importantly, the court concluded that these poor decisions of the debtor did not materially affect the bottom line of the debtor’s reasonable expenses.

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Ultimately, the court ordered that the debtor’s foolish or poor financial decisions did not value more than $10,000, so the creditor would hold a non-dischargeable claim for $10,000, plus interest at the contract rate; the remainder of the approximately $93,000 student loan would be discharged.” – Source

My summation is this… I find that the courts are continuing to struggle with how to rule on undue hardship in a consistent manner when they are constrained by the confines of the now antiquated Brunner Test, and must continue to examine each “prong” on its merits, and then determine if the plaintiff passes all three before granting a discharge.

In this case I agree with the sound decision of Judge Pappas to “splitting the baby” as writer Gill called it. To those of you reading this, take caution, your spending habits may be reason enough to not win a full discharge.

The Honorable Judge Jim Pappas is best know for his precedent case Roth vs ECMC, and he has been very critical of the Brunner Test for many years. Unfortunately the test remains to be proven. But as I demonstrated in my own successful discharge of $130,000 in February 2016, it is not impossible.

This article by Richard Allan Precht first appeared on Undue Hardship-Poverty Required and was distributed by the Personal Finance Syndication Network.