Decision Reversed, Mom Can’t Wipe Out Student Loans in Bankruptcy

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By Diane Davis

A mother separated from her husband with three small children failed to show that having to repay more than $25,000 in student loan debt would cause undue financial hardship and so can’t wipe out the debt in bankruptcy, the U.S. District Court for the Eastern District of Pennsylvania held.

Kristin Price didn’t demonstrate “that it is more likely than not that she will be unable to maintain a minimal standard of living for a significant portion of her loan term,” Judge Edward G. Smith wrote Jan. 24, reversing the bankruptcy court’s ruling in favor of Price in her Chapter 7 case.

Even though Smith agreed with the bankruptcy court that it was a “close case” and a “difficult decision,” he ultimately found the bankruptcy court’s analysis “flawed.”

The bankruptcy court’s ruling was considered a “win” by consumer advocates, gaining new ground for young, healthy, and working debtors who are trying to repay their debts but still need a bankruptcy discharge due to undue hardship. The district court’s reversal, however, is in line with the U.S. Department of Education’s tough stance on debtors, encouraging them not to even try to get their student loan debts discharged.

Student loan debt is dischargeable in bankruptcy under Bankruptcy Code Section 523(a)(8) but only if a debtor can show that repayment of the debt would impose an “undue hardship” on her and her dependents.

The bankruptcy court applied the so-called Brunner test for determining undue hardship. It requires that the debtor prove she can’t maintain a minimum standard of living for herself and her dependents, that this state of affairs is likely to persist for a significant portion of the repayment period, and that she made a good faith effort to repay the loans.

Because courts view Section 523(a)(8) as a narrow exception, they place a high burden of proof on a debtor seeking discharge. The determination of undue hardship is based on law and fact and is made on a case-by-case basis.

Appeal Ruling

Two bankruptcy attorneys familiar with student loan cases found the district court’s analysis “flawed” and so did the debtor’s counsel, who said they plan to appeal to the U.S. Court of Appeals for the Third Circuit.

“We are disappointed, but not surprised,” Price’s attorney Scott F. Waterman, Waterman & Mayer, LLP, in Media, Pa., told Bloomberg Law via email Jan. 29.

“The district court reversed the decision on a narrow factual basis,” Waterman said. “We believe it misinterpreted the bankruptcy court’s discussion on the burden of proof, confusing it with the proper burden of persuasion that exists when one party provides unrebutted evidence supporting its position,” he said.

The district court “failed to provide proper deference to the bankruptcy court’s findings of fact—findings of fact can only be reversed based upon abuse of discretion,” Waterman said.

“The issue of what is the proper standard of review of findings of fact and the application of those facts is actually pending before the U.S. Supreme Court in U.S. Bank National Association v. The Village at Lakeridge, Waterman said.

Price, a licensed vascular sonographer, is only working part-time because she says the market is “saturated” with sonographers and she can’t get more work.

She also falls under the “childcare squeeze” because two of her children have several years before they will attend school full time. As a result, if Price were to work full time, her additional employment would be offset by additional childcare expenses.

The district court focused on whether Price could find additional employment in her field in the future. The bankruptcy court based its decision on an analysis of the next five years, but the record lacked any evidence of Price’s chances of finding full-time employment with a different employer in the future, the court said.

Further, the bankruptcy court made an assumption about the level of saturation in the market and the likelihood it would persist without any additional information, the court said.

Considering all of the facts as a whole, the district court said it couldn’t conclude it was “more likely than not that Price will be unable to maintain a minimal standard of living for the next five years.”

Deference to Bankruptcy Court

The district court failed to give the proper weight to factual findings of the judge conducting the hearing, according to bankruptcy attorneys.

“Deference should be given to the trial judge” who is in a better position after hearing testimony to make these decisions, John Rao, an attorney with the National Consumer Law Center in Boston who specializes in bankruptcy and mortgage servicing, told Bloomberg Law Jan. 29.

These cases are challenging to win, he said.

“We were thrilled with the initial decision,” Rao said, because it gained new ground applying the undue hardship standard to a debtor who is working and isn’t handicapped.

Rao said he found similarities in this case and a 2013 case in the Seventh Circuit, Krieger v. Educ. Credit Mgmt. Corp. In Krieger, the judge had to apply a “multi-factor standard interpreting an open-ended statute,” he said. The more “vague the standard, the harder it is to find error in its application,” the Krieger court said.

Edward C. Boltz, a consumer advocate and partner with the Law Offices of John T. Orcutt, P.C., Durham, N.C., told Bloomberg Law Jan. 29, the district court gave “little weight to the judge that conducted the hearing.”

Similar to Acosta-Conniff v. Educ. Credit Mgmt. Corp. , the “district court mouths the standard that it ‘reviews the bankruptcy court’s factual findings for clear error’ but then really appears to review all of the bankruptcy court’s factual findings de novo,” Boltz said.

He “hopes the Third Circuit follows the Eleventh Circuit in Acosta-Conniff and reminds district courts to defer to the bankruptcy court on factual issues,” Boltz said.

Looking at Bigger Picture

Looking at the “bigger picture,” consumer bankruptcy attorneys view the district court’s reversal in other ways.

This case “fits the pattern of the Department of Education fighting a scorched earth battle over student loans,” according to Boltz, who is the former president of the National Association of Consumer Bankruptcy Attorneys.

“The costs to the federal government in opposing this discharge likely equal or exceed the amount that it might eventually collect from Ms.Price,” Boltz pointed out. “That leads to the conclusion that it isn’t these loans that matter, but squashing the idea that any debtor should try [to discharge them],” he said.

Even if the Third Circuit rules in Price’s favor and vacates the district court’s decision, it will most likely remand the case back to the bankruptcy court so the court can hear more evidence about the “saturation” in the marketplace, Rao said.

The Education Department wouldn’t comment on the case.

Scott F. Waterman, Media, Pa., and Matthew Hamermesh, Hangley Aronchick Segal & Pudlin, Philadelphia, represented Price; Anthony St. Joseph Philadelphia, represented DOE and U.S.; Trustee Gary F. Seitz, Philadelphia, represented himself.

The case is DeVos v. Price , E.D. Pa., 17-3064, 1/24/18 .

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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