Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...
May 5 — A bankruptcy court for the District of Idaho flexed its equitable muscles to fashion a ruling that mostly granted a debtor's action to have her student loans discharged, while ruling some of the debt should remain non-dischargeable.
The decision by Judge Jim Pappas questioned the policy behind the Bankruptcy Code's treatment of student loan debt — something Pappas and other bankruptcy judges have done before.
In a thorough 82-page memorandum decision, the court mostly ruled in favor of the Chapter 7 debtor, a single mother struggling with medical problems and claiming that not discharging her student loans would create a burden of undue hardship.
The court found that most of her $93,000 of student loan debt would be discharged, but that $10,000, plus interest accruing at the contract rate, would remain non-dischargeable pursuant to Section 523(a)(8) of the Bankruptcy Code.
As noted by the court, it is an “arduous task” to get relief from student loans in bankruptcy. Section 523(a)(8) of the Code provides that student loans are presumed not dischargeable.
However, a debtor can rebut the presumption by proving through an adversary proceeding that not “excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents.”
The Code does not define “undue hardship.” One of the seminal cases addressing that thorny question — and the authority followed in this case — is Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), which established a three-prong test for finding “undue hardship.” Pursuant to Brunner, the debtor must prove each of these elements:
Many commentators, politicians, judges and attorneys have been critical of the difficult barriers that the Bankruptcy Code sets before debtors burdened with oppressive student loan debt. But as noted by most bankruptcy courts considering the issues, any perceived problems with the statute are matters of policy, and only the Congress can effect a change there.
As to the difficult threshold created by Brunner and its progeny, bankruptcy courts are similarly bound by the circuit courts adopting that rigid standard. In this case, Judge Pappas cites his own concurring opinion in an earlier case as support for his opinion that “it is doubtful the Code's and courts' current approach to this serious problem [i.e., the prevalent condition of the nation's students taking on more debt than they can realistically expect to repay] is up to the task.”Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir. 2013).
The debtor, a single mother, suffered from a host of medical problems which to some extent limited her earning potential. The court found that the first test was met — the debtor's monthly expenses of at least $3,600 were reasonably minimal and necessary and exceeded her net monthly income of about $2,500. The court concluded that even after considering some ill-advised financial expenditures of the debtor, her monthly expenses were extremely low considering the demands of single-parenthood.
As for the second prong, the court ruled that the debtor's ongoing medical problems — despite a lack of professional consensus regarding the proper diagnoses and prognoses — was sufficient to satisfy the requirement that there be “additional circumstances” indicating that the debtor's financial condition would persist for a substantial period.
Finally, the court concluded that the third prong (demonstration of a good faith effort to repay the debt) was satisfied by the evidence. The court found that the debtor reasonably attempted to earn a good income while living modestly, and tried to utilize loan deferral or assistance programs to help facilitate her paying her student loan obligations.
The court noted that the creditor was correct in that a number of expenditures made by the debtor were not reasonable for determining a “minimal” standard of living, including making payments for certain expenses of the debtor's adult daughter, maintaining a recreational motorcycle with its incumbent purchase and insurance payments, taking an expensive trip abroad (even though mostly subsidized by a loan from the debtor's mother), and buying the debtor's minor son an expensive smart phone.
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 the 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.
Ultimately, the court ordered that the debtor's foolish or poor financial decisions did not total a value of 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 loans would be discharged.
Stephen A. Meikle, Idaho Falls, Idaho, appeared on behalf of the plaintiff, Elizabeth M. McDowell. Thomas E. Dvorak of Givens, Pursley LLP, Boise, Idaho, appeared on behalf of defendant Education Credit Management Corporation.
To contact the reporter on this story: Daniel Gill in Washington at email@example.com.
To contact the editor responsible for this story: Jay Horowitz at firstname.lastname@example.org.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)