By Ryan C. Wood
Our media and politicians love to discuss and complain about student loan debt. Student loan debt should be no different, better or worse, than home mortgages. Home mortgages and student loans both allow someone to obtain something expensive now and pay for it later over a long period of time to make it affordable. For homes it allows people who otherwise could not purchase a home purchase a home. Student loans likewise allow someone to obtain an expensive education now that they cannot afford. As long as the home appreciates in value the home loan is a good deal and there is a return on the investment. Student loans are also supposed create a return on investment. The problem is student loans are approved with no real analysis of the likelihood of the borrower paying them back. What is the potential return on investment? At the moment for student loans it does not matter. Why scrutinize the borrower’s chances of paying the student loans back if the loan is federally subsidized and almost impossible to get rid of? Why scrutinize the institution the borrower is attending.
Brief Summary of the Problem Discharging Student Loans
Fake news and social media warps the truth. The truth is the Bankruptcy Code permits debtors showing undue hardship to discharge student loan debt when filing for bankruptcy. The problems is showing an undue hardship is dreadfully different depending upon what circuit you live in given the circuits are divided on how to determine whether undue hardship exists. The First Circuit and Eighth Circuit use the totality of the circumstances test. Many circuits, like the Ninth Circuit, use a three-part test developed by the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987). Then there is the application of the three-part Brunner test by circuits that apply Brunner. Application and results vary widely. According to many bankruptcy lawyers the Fifth Circuit is needlessly harsh in its application of the Brunner test rendering it virtually impossible to satisfy. This is why the Bankruptcy Code’s language providing for the discharge of student loan debt is fake news for most bankruptcy filers even though
Money Matters Given You Have to Sue the Student Loan Company to Prove Undue Hardship and Discharge Student Loans
Money matters when speaking about attempting to discharge student loans when filing for bankruptcy. A typical Chapter 7 Bankruptcy filer in the State of California is living paycheck to paycheck and has less than $10,000 in assets, not including their car or retirement account. How can a bankruptcy attorney get paid for suing the bankruptcy filers student loan company? With no guarantee of success and a client with almost no ability to pay their attorney to litigate whether their student loans are an undue hardship what happens? Lawsuits or adversary proceedings to try and discharge student loans are rare on this basis alone. In California we have Civil Code Section 1717 awarding attorneys fees and expenses to the prevailing party. What about if you lose and the student loan company is awarded their fees/expenses for the litigation? That is going to be anywhere from $15,000 – $60,000 added to whatever student loans must paid back post-discharge. The cost benefit analysis almost always on balance results in not suing the student loan company.
Income Based Repayment (IBR) and The Supreme Court of the United States
There is an appeal before the Supreme Court of the United States from the United States Court of Appeals of the Fifth Circuit; Thelma G. McCoy, Petitioner, vs. United States, Case No. 20-886. The facts of this include income based repayment and the three prong Brunner Test. Ms. McCoy’s student loan payments were set at $0.00 at the time she filed for bankruptcy and sued here student loan company due to being enrolled in an income based repayment plan. If she did not obtain a higher paying job she would not have to make a higher student loan payment in the future. Begs the question how can student loans be an undue hardship if the monthly payment is limited to $0.00 each month? If your income increases you may have to pay more than $0.00 each month. What is also missing in the fake news and social media is a discussion or analysis about all the programs in real world for those having problems paying back student loans. Depending upon the IBR program, after 25 years in the IBR program and making the required payments, the remaining principal and interest are cancelled. See Code of Federal Regulations; 34 C.F.R. 685.221(f)(2).
People Interpreting The Law Is Always The Problem
The U.S. Constitution from day one provided we are all entitled to equal protection under the law and due process. How has that worked out? It comes down to human interpretation. It is almost always human interpretation of the law that is problem and not the law itself. The argument begins at the macro level [President, Vice President, Senator, Congressman, Supreme Court] when the real issue is the interpretation of the law at the micro level [Gov. Employee, Administrative Judge, Attorney, Corporation]. Who are the one or two human beings that will make the interpretation of the law you are addressing at your level? It is not the Supreme Court of the United States. Not the President of the United States or any part of your elected Congress. You need to be concerned about the decision making person that was never appointed by the President of the United States or ever elected to office. This person was hired to do a job and their interpretation and opinion is the most important at your micro level.
Brief History of Student Loans and Discharge When Filing Bankruptcy
The last major change to student loans and the ability to discharge student loans when filing bankruptcy was 2005. The BAPCPA Bankruptcy A Protection Consumer Protection Act.
Section 523(a)(8) of the Bankruptcy Code provides:
(a)A discharge under section 727, 1141, 1192  1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A) (i)an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii)an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
Debt Not Excepted From Discharge Under § 523(a)(8)(A)(ii) Because it was Not an Obligation For “Funds Received”
Prior to the Bankruptcy Consumer Protection Act of 2005, the language of Section 523(a)(8) was different. The words “funds changing hands” or “funds received” are now a separate category delinked from the phrases “educational benefit or loan.”
Except from discharge means not dischargeable or not discharged. Debts excepted from discharge and types of debts that would normally be discharge but for specific law providing certain types of debts are not discharged or excepted from discharge. Student loans are general unsecured debts and generally unsecured debts are dischargeable.
Section 523(a)(8) excepts from discharge four types of student debt: (1) 523(a)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit; or (2) made under any program fund in whole or in part by a governmental unit or nonprofit institution, or (3) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (4) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor that is an individual. Meridian concedes it is not a governmental unit and the credit is not a qualified education loan as defined by section 221(d)(1) of the Internal Revenue Code. So that leaves number (3) above. Christoff received two tuition credits totaling $11,000 and she signed a promissory note with interest of 9%. She agreed to repay the tuition credits upon graduation at $350 per month. Christoff did not receive any funds and did not complete the program and graduate.
In 2013, Christoff filed for bankruptcy protection under Chapter 7 and Meridian filed an adversary proceeding lawsuit to determine if the tuition credits are excepted from discharge under Section 523(a)(8). This case addresses the language of Section 523(a)(8)(A)(ii) which provides “an obligation to repay funds received as an educational benefit, scholarship or stipend” is excepted from discharge. Meridian argued that Christoff received a loan in the form of a tuition credit and received an education. Christoff’s bankruptcy attorney argued that she never received any funds from Meridian and Meridian did not receive any funds from a third-party financing source. Judge Montali focuses on the language “funds received” in Section 523(a)(8)(A)(ii). The Court analyzed a number of cases from other circuits and the Ninth Circuit regarding Section 523(a)(8). Again, the main distinction between the various cases and decisions is whether the debtor/student actually “received funds.”
In the Christoff case in the Northern District of California, Judge Montali ruled that because the debtor’s obligations arose from funds not received by the debtor or Meridian from any other source, the underlying debt is not covered by Section 523(a)(8)(ii) and eligible for discharge. On June 26, 2014, Meridian College appealed Judge Montali’s ruling to the Bankruptcy Appellate Panel, Case No. NC14-1336.
Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662, 666 (9th Cir. 2014) The plain language of this prong of the statute (Section 523(a)(8)) requires that a debtor receive actual funds in order to obtain a nondischargeable educational benefit.” Cazenovia Coll. v. Renshaw (In re Renshaw), 229 B.R. 552, 555 n.5 (2d Cir. BAP 1999), aff’d, 222 F.3d 82 (2d Cir. 2000)) Again, no funds were received so Section 528(a)(8)(A)(ii) did not except from discharge the tuition credits Ms. Christoff received.
3rd Prong of Brunner Test: Good Faith Effort to Repay the Student Loans
The main issue in the case was the 3rd prong of the Bruner Test, good faith effort to repay the loans. Whether someone has made a good faith effort to repay the student loans is more complicated and involves more issues that just making a monthly payment. A thorough conversation with your bankruptcy attorney should be had regarding these issues. Good faith can be measured by student loan holder’s efforts to obtain employment, the type of employment, the level of pay of the employment. The good faith prong also involves the student loan holder expenses. Did they minimize their expenses? Are their expenses for certain things too high given their income? The good faith prong also evaluates whether the student loan holder took advantage of payment plan options of the student loan company.
It was found that Hedlund was maximizing his employment income with his current employment in Klamath Falls. Heldund had also applied to two higher paying jobs. The Court noted that Hedlund had attempted to take the bar exam unsuccessfully three times. Not that passing the bar would have increased his income. Next the Court reviewed Hedlund’s expenses and found that his clothing, recreation and miscellaneous budgets including childcare and haircuts could be reduced.
Again, the District Court reviewed the original trial case de novo and found that Hedlund had not used his best efforts to maximize his income or minimize his expenses. The District Court notably criticized Hedlund for choosing to live as a single-income family, “a lifestyle that few today an afford.” Hedlund v. Educ. Res. Inst. Inc, 468 B.R. 901, 916 (D. Or. 2012). In the end the District Court should have reviewed the good faith prong of the test for clear error. The Ninth Circuit Court of Appeals found there was not clear error in the original bankruptcy court’s judgment to partially discharge Hedlund’s student loans.