Ch. 7 Debtor's Failure to Utilize Repayment Program Is Strong Evidence of Bad Faith

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Educational Credit Management Corp. v. Krieger, C.D. Ill., No. 1:12-cv-01164 (JBM), 11/6/12

  • Key Holding: District court reverses bankruptcy court's judgment discharging debtor's student loans.

  • Key Takeaway: Debtor's failure to utilize the William D. Ford Income-Based Repayment program “strong evidence” she did not make good faith effort to repay loans.

By Stephanie M. Acree

A Chapter 7 debtor was not entitled to have her student loans discharged because she failed to identify “additional circumstances” that would demonstrate her financial condition was unlikely to improve in the future, the U.S. District Court for the Central District of Illinois concluded Nov. 6 (Educational Credit Management Corp. v. Krieger, C.D. Ill., No. 1:12-cv-01164 (JBM), 11/6/12).

Judge Joe B. McDade also found that the debtor had not made a good faith effort to repay her loans in part because she had failed to take advantage of alternative repayment plans. The decision was a reversal of the bankruptcy court's judgment, which found that the debtor had satisfied the three-part undue hardship test for discharging student loans in bankruptcy.

Five Loans
Debtor Susan M. Krieger obtained her paralegal certificate in December 2000 and completed her bachelor or arts degree with a major in legal studies in August 2002. Krieger financed her education in part with five student loans which totaled $25,416 in their original amounts.

In 2001, Krieger divorced her second husband and as part of their property settlement she received a mutual fund worth $52,000 and her savings account balance of $10,000. She was also entitled to receive $1,200 per month in maintenance for five years. From those funds, she was required to pay $529 per month towards a vehicle lease signed by her husband for her car. Despite their divorce, Krieger remained in her husband's home until 2005 because of their children and she did not receive maintenance payments during this time.

In 2005, Krieger moved into an apartment and continued to seek legal employment while living off of her marriage settlement. She and her former husband renegotiated the terms of her alimony and reduced the amount to $650, from which she was still responsible for the car payments.

'Unavailing' Job Search
Krieger began searching for legal jobs after receiving her paralegal certificate, but her search was “unavailing.” Krieger testified to the bankruptcy court that she applied for at least 180 jobs in the 10 years prior to her bankruptcy but without success.

Krieger's apartment flooded in November 2008 and she 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.” Krieger's only source of income after moving in with her mother was $200 per month in government food assistance.

“The mutual funds account and savings account funds she was awarded in the 2001 divorce have been exhausted and she 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.”

Discharge and Appeal
Since Krieger's student loan payments have become due, she has obtained various deferments and forbearances. While she was still in school she made a $4,000 payment with funds from her divorce settlement. She made other smaller payments over the years, but had not made a payment since 2006. As of March 25, 2011, the total due on the loans was $24,185.

Krieger filed for Chapter 7 protection on Jan. 24, 2011, and subsequently filed an adversary complaint seeking a determination that her student loans were dischargeable on undue hardship grounds. The bankruptcy court found that the debtor had established she met the three-part test for undue hardship and discharged the loans.

Creditor Educational Credit Management Corporation appealed the decision to the district court.

Brunner Test
The test that has been adopted by the Seventh Circuit for discharging student loans, which are presumptively non-dischargeable in bankruptcy, comes from the U.S. Court of Appeals for the Second Circuit's decision in Brunner v. New York State Higher Education Services Corp., , 831 F.2d 395, (2d Cir. 1987). The court must determine if the loans will impose an “undue hardship” on the debtor, which requires a showing that:

(1) The debtor cannot maintain a minimal standard of living if forced to repay the loans;

(2) Additional circumstances suggest that the debtor's state of affairs will continue to persist for a significant portion of the repayment period; and

(3) The debtor has made a good faith effort to repay the loans.


The appellant conceded that Krieger would not be able to maintain a minimal standard of living if forced the repay the loans, and therefore the district court did not review this factor. However, the district court did find that Krieger had not proven the “additional circumstances” necessary pursuant to part two of the test, nor had she made a good faith effort to repay the loans.

No 'Additional Circumstances'
Though the bankruptcy court concluded that Krieger had made sufficient attempts to find employment, the district court found that she had not made enough of an effort to find a job outside her chosen field.

“The fact that [Krieger] has so rarely applied for jobs outside her preferred area casts significant doubt on the idea that her current unemployment is due to 'additional circumstances' that will necessarily persist into the future, but instead shows that it is likely due to her unwillingness to consider other types of work,” the court said.

Furthermore, the court said that Krieger is 52 and in good health with no major disabilities and that there is “no objective reason” she should not be able to find work. The court also found that the current “poor economy” was not a sufficient excuse for Krieger's failure to find employment. Having found that Krieger had shown “nothing extraordinary” that would indicate an inability to work, the court concluded that she failed to satisfy the second part of the Brunner test.

'Strong Evidence of Bad Faith'
Regarding Krieger's efforts to repay, the court said it agreed that Krieger had made a good faith effort to pay off her loans up until 2006, but not since then. Since 2006, the court said Krieger had made no payments and had made no attempt to investigate alternative repayment plans.

In particular, the court cited the William D. Ford Income-Based Repayment program under which the court said “a debtor who is qualified to make $0 payments is still considered to be in repayment, and will have her debt burden completely forgiven after 25 years of qualifying 'payments' - even if she has never actually paid anything because her earnings were never high enough to result in a positive payment under the plan.”

The court said that several court have considered the debtor's failure to utilize such repayment plans to be “very strong evidence of bad faith.” The court said that a debtor must explain why such repayment plans are not feasible given the debtor's particular situation, which Krieger failed to do. Therefore the court found that Krieger had not made a good faith effort to repay the loans.

Accordingly, the court found that the bankruptcy court's application of the Brunner test was erroneous and the bankruptcy court's judgment was reversed.

By Stephanie M. Acree

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