Tuesday, August 25, 2015

Student loan debt and bankruptcy update

Here at Shenwick & Associates, many of our bankruptcy clients (especially younger ones) have outstanding student loans. Although the Bankruptcy Code doesn't contain an express prohibition against discharging student loans in bankruptcy, the bar to doing so is very high. Most (but not all, as we'll discuss below) appellate courts, follow the standard laid out in Brunner v. New York State Higher Education Services Corp. The debtor must show that: (1) he or she cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off the student loan; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and (3) that he or she has made good faith efforts to repay the loans.

Unfortunately for debtors in New York, Connecticut and Vermont (whose federal courts are under the jurisdiction of the Second Circuit Court of Appeals), the Brunner test remains good law and will do so until either the Second Circuit or the Supreme Court overrules Brunner or Congress amends the Bankruptcy Code. However, in the 28 years since Brunner, the standard has increasingly come under attack. An article in The New York Times last month discussed some of the debtors who have fought to get their loans discharged in bankruptcy and the judges who have dissented from Brunner.

The article focused on two cases from 2013, Krieger v. Educational Credit Management Corp. (In re Krieger) (7th Cir.) and Roth v. Educational Credit Management Corp.(In re Roth) (B.A.P. 9th Cir.). In In re Krieger, the debtor lived in a rural area of Illinois and cared for her elderly mother while unsuccessfully searching for paralegal work for a decade. Despite the slim likelihood the debtor would be able to repay any of her $25,000 student debt, the loan holder argued that she should enroll in an income-based repayment program. In an opinion written by the influential Judge Frank Easterbrook (who was Chief Judge at the time) discharging the debtor's student loan debts, Judge Easterbrook claimed that the Brunner standard was threatening to supersede the "undue hardship" provision of Bankruptcy Code § 523(a)(8) and convert it into a "certainty of hopelessness."

That same month, a similar decision was issued in In re Roth. In this case, the 64 year old debtor had acquired $33,000 of student loan debt (which ballooned to $95,000 in default) acquired years earlier, citing a variety of physical and mental ailments. She successfully discharged her medical debt in bankruptcy, but had to commence an adversary proceeding to prove "undue hardship," copying statutes at a local law library and watching episodes of "Law and Order." The Bankruptcy Appellate Panel held that "failure to negotiate or accept an alternate payment plan is not dispositive" of a finding of good faith. And in a concurring opinion, Judge Pappas pointed out that both § 523(a)(8) and student loan borrowing have changed since 1987, calling Brunner "a relic of times long gone."

Until Brunner is legislatively or judicially overruled, consider some of these student loan debt strategies, and contact Jim Shenwick for an analysis of your student loan and other debts.