A Chapter 7 debtor's student loans were properly discharged by a bankruptcy court based on undue hardship, the U.S. Court of Appeals for the Seventh Circuit held April 10, reversing the decision of the district court (Krieger v. Educational Credit Management Corp., 7th Cir., No. 12-3592, 4/10/13).
Judge Frank H. Easterbrook found no clear error in the bankruptcy court's decision that the debtor's inability to repay was likely to persist, despite the district court's contention that there were no “additional circumstances” that would suggest her situation would not improve.
After her apartment flooded in November 2008, Krieger moved to her 74-year-old mother's home in Dallas City, which the bankruptcy court described as “a small rural community of less than 1,000 people, located on the Mississippi River in West Central Illinois.”
“[S]he has no savings or investments of any kind,” the bankruptcy court said, outlining its factual findings regarding Krieger's financial condition. “Her vehicle, which her former husband purchased for her at the termination of the lease, is over a decade old and is in need of repairs, which she cannot afford to make. She no longer has a cell phone. She has no health insurance and cannot afford medical or dental care. Because she could no longer afford internet service, her job search became more difficult and, based on the rural nature of where she lives, her opportunities diminished significantly.” Krieger's only source of income after moving in with her mother was $200 per month in government food assistance.
The district court found that Krieger had not made enough of an effort to find a job outside of her chosen field. The district court said that Krieger was in good health with no major disabilities and that there is “no objective reason” she should not be able to find work in the future. Krieger also had not utilized certain repayment plans like the William D. Ford Income-Based Repayment Plan (IBR), which the court said suggested she had not made a good faith effort to repay the loans. The district court thus reversed the bankruptcy court's ruling (24 BBLR 1515, 11/22/12). Krieger appealed to the Seventh Circuit.
The Seventh Circuit interpreted the Brunner test as requiring a “certainty of hopelessness” in In re Roberson, 999 F.2d 1132, (7th Cir. 1993).
“[I]f this is so,” the court of appeals said, “no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve.” The court said such an interpretation would be inconsistent with the statute, which does not forbid discharge of student loans. The court also said the language employed by Brunner and Roberson should not be allowed to “supersede the statute itself,” which does allow student loans to be discharged if they are an “undue hardship.”
In this case, the bankruptcy court made the factual finding that Krieger's circumstances were likely to persist indefinitely, and the court of appeals found that this was not clearly erroneous, despite the district court's contention that no “additional circumstances” were present to suggest Krieger's condition would persist. The court said that the district court and the appellee both conceded that even if Krieger were to enroll in a repayment plan, she would probably still never be able to make payments.
“To the extent that the district judge thought that debtors always must agree to a payment plan and forgo a discharge,” the court said, “that is a proposition of law--an incorrect proposition, for the reasons we have given.” Having found that the bankruptcy court committed no clear error in determining that Krieger satisfied the Brunner test, the court of appeals reinstated the discharge.
“[F]or those who perceive that their employment-seeking efforts are at a dead end, bankruptcy should not be the answer,” Judge Manion said. “Rather than challenging the non-dischargeability barrier in bankruptcy, those who have concluded that there is no way they can pay off the debt should be required to enroll in the William D. Ford Income-Based Repayment Plan.”
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