The Eleventh Circuit reversed a district judge in Alabama whose opinion in substance meant that student loans will not be discharged if incurring the debt was within the debtor’s control.
In the Court of Appeals, the debtor was represented pro bono by retired Chicago Bankruptcy Judge Eugene R. Wedoff and his son Carl N. Wedoff of Jenner & Block LLP in New York, along with Catherine Steege and Nicholas E. Ballen from Jenner & Block’s Chicago office. Tara A. Twomey of the National Consumer Bankruptcy Rights Center filed an amicus brief on behalf of the debtor. Carl Wedoff argued the case in the circuit.
Wedoff is the president of the American Bankruptcy Institute for a one-year term beginning at ABI’s Annual Spring Meeting, which starts in earnest today in Washington, D.C.
The Eleventh Circuit’s per curiam opinion on April 19 firmly stands for the proposition that the inability to pay student loans is a “forward-looking test” that “does not look backward to assess blame for the student debtor’s financial circumstances.”
A Single Mother with Huge Debt
The debtor was a single mother of two teenage children with $112,000 in student loans incurred while earning four degrees, including a Ph.D. in special education. At the top of the pay scale in her Alabama school district, she had been denied a promotion to an administrative position. Compounding her problems, the woman was diabetic and morbidly obese, requiring her to seek a transfer to a less demanding teaching position.
The loans required $915 a month for 15 years, but she had a monthly shortfall even before debt service on the student loans.
Chief Bankruptcy Judge William R. Sawyer of Montgomery, Ala., tried the case and discharged the debt under Section 523(a)(8) as imposing an “undue hardship.” On appeal, District Judge W. Keith Watkins of Montgomery reversed and directed entry of judgment excepting the student loans from discharge.
The District Court Opinion
Even though the bankruptcy judge found that the teacher’s income was unlikely to increase substantially in the future, Judge Watkins said that the debtor must “ultimately bear the consequences of her decision to obtain loans in order to pursue her multiple educational goals.”
The debtor testified that she did not seek employment elsewhere because she would lose tenure. Although he agreed that her concerns were “understandable,” Judge Watkins said “her decision to stay in the area also is one she made of her own volition after measured deliberations.”
Judge Watkins appeared to interpret the Third Circuit’s Brightful decision to mean that student loans will not be discharged if incurring the debt was within the debtor’s control. He did not limit that case to situations where improving the debtor’s income was within the debtor’s control, which were the circumstances in Brightful. His opinion seemed to mean that illness or some other incapacity must be proven before discharging student loans.
The Circuit’s Reversal
The circuit court recited the Brunner test, which requires a debtor to show (1) the inability to maintain a minimal standard of living if forced to repay the loans, (2) the likelihood that the situation will persist for a significant portion of the repayment period, and (3) a good faith effort to repay the loans.
The district court believed that the debtor failed the second test: a persistent inability to repay the loans. The appeals court characterized the district judge as saying that the debtor “has only herself to blame for incurring student debt in the pursuit of multiple degrees that she should have known would not lead to an increase in income sufficient to cover the debt.”
The circuit quoted the district court’s statement that the debtor must “ultimately bear the consequences of her decision to obtain loans in order to pursue her multiple educational goals.”
Reversing the district court, the Eleventh Circuit said that the “second prong is a forward-looking test that focuses on whether the debtor has shown her inability to repay . . . . It does not look backwards to assess blame.”
Establishing an important precedent for student loan debtors, the appeals court said, “Thus, even if the court concludes that a debtor has acted recklessly or foolishly in accumulating student debt, that does not play into an analysis under the second prong.”
Unsure whether the district court employed the de novo or clear error standard on appeal, the appeals court remanded the case to the district court with instructions to apply the clear error test to the bankruptcy court’s findings under all three prongs of the Brunner test and de novo review to legal conclusions. The circuit hinted that the district court might remand the case to the bankruptcy court for further findings of fact.
Unless the circuit changes its mind, the opinion is not to be officially published. Given the importance of the holding, the decision should appear in F.3d.
To read ABI’s discussion of the district court opinion, click here.