Disabled Ch. 7 Debtor, Wife Can Discharge Medical School Loans

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By Diane Davis

Oct. 12— A permanently disabled husband and his wife who suffers from depression and anxiety can get their student loans for medical school discharged in bankruptcy because requiring payment would cause an undue hardship, a bankruptcy court in Louisiana held Oct. 7 ( Demmons v. R3 Educ., Inc. (In re Demmons) , 2016 BL 336955, Bankr. E.D. La., No. 15-1024, 10/7/16 ).

Judge Jerry A. Brown of the U.S. Bankruptcy Court for the Eastern District of Louisiana concluded that the debtors met all three prongs of the Brunner test, which is a difficult test to satisfy.

To evaluate whether an undue hardship exists for the discharge of student loans, the majority of circuits follow the test adopted by the Second Circuit in Brunner v. New York State Higher Education Servs. Corp., 831 F.2d 395 (2d Cir. 1987), the court said. Bankruptcy courts in the Fifth Circuit have been using the Brunner test since 2003, when analyzing student loan discharge cases, the court said.

According to Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 63 (D. Michael Lynn et al. eds., 2016), the three-part test requires the court to find that: (1) the debtor can’t maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

The bankruptcy court found that the testimony and evidence presented by debtors William A. Demmons, III, and his wife Karen S. Fowler was credible and persuasive that repaying their student loans would cause an undue hardship.

Demmons and his wife both attended medical school in the Netherlands Antilles at Saba University School of Medicine. Demmons graduated but before he could begin his residency, he was involved in a car accident that rendered him permanently disabled from spinal injuries. At 59 years old, Demmons is only able to work at a hospital in Houma, La., as an emergency department technician due to his physical issues.

Fowler, age 48, had significant health issues including depression and anxiety and can’t afford to get medical treatment. Due to her anxiety, she is only able to work at home at a job that is sporadic at times.

Holding Down Expenses

The court looked at the couple’s expenses and determined that the debtors were trying very hard to hold down their expenses and live within their meager income. The court also noted that the debtors had forgone medical treatment and dental care due to lack of funds. “ Brunner doesn’t require the debtor to live in abject poverty to satisfy the first prong,” the court said.

The court found that Demmons has a permanent medical disability that is a significant hindrance in his attempts to find employment that would produce more income than he currently makes. This situation is likely to continue for a significant portion of the repayment period, the court said.

Good Faith Efforts to Repay

Demmons and Fowler both made good faith efforts to repay their loans, the court said. Since 2011, Demmons has paid $15,713 over several years, and Fowler has paid $6,383, the court said.

Educational Credit Management Corporation (ECMC) argued that Demmons hadn’t acted in good faith because he declined to enter into further Income Based Repayment (IBR) agreements after filing this adversary proceeding.

The court rejected ECMC’s argument, noting that some courts have found that there are tax consequences for the debtor who enters into an IBR plan because during the plan, the amount of the loan continues to grow and then at the end of the plan, the amount of the loan that is forgiven can become a tax liability for the debtor. Essentially, the debtor exchanges one non-dischargeable student loan debt for another non-dischargeable tax debt, which doesn’t provide the “fresh start” envisioned by the Bankruptcy Code, the court said.

On the eve of trial, the debtors reached a settlement with Saba University on their breach of contract and fraudulent misrepresentation claims. Although the settlement amount is confidential, the creditors argued that the court should require the amount of the settlement to be applied to the debtors’ student loan debt.

The court declined to issue a partial discharge. Bankruptcy Code Section 523(a)(8) doesn’t allow it, the court said. The evidence also doesn’t allow the court to make an informed decision about how to allocate the proceeds, the court said.

Robin R. DeLeo, Mandeville, La., Mary M. Taylor, Pontchartrain Law Center, Metairie, La., represented debtors William A. Demmons, III, Karen S. Fowler; Defendant American Educational Services, pro se; Defendant Maine Educational Services, pro se; Defendant Navient Solutions, Inc., pro se; Joseph M. McCandlish, Weltman Weinberg & Reis Co., LPA, Grove City, Ohio; Earl F. Sundmaker, The Sundmaker Firm, New Orleans, La., represented Defendant Key Bank N.A.; Joseph M. McCandlish, Weltman Weinberg & Reis Co., LPA, Grove City, Ohio, represented Defendant Key Bank USA, N.A.; Heather A. LaSalle, McGlinchey Stafford, PLLC, New Orleans, La., represented Defendant Educational Credit Management Corporation.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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