Judge Develops a Creative Remedy to Deal with Nondischargeable Student Loans

The difficulties that bankruptcy judges face in discharging student loans can result in the invention of creative remedies, as shown in a Sept. 25 opinion by Bankruptcy Judge Robert E. Nugent of Wichita, Kan.

The debtor was a 59-year-old single woman with no dependents. Employed, her gross annual income had ranged between $40,000 and $43,000. There was little chance her income would increase significantly. Her standard of living was “spartan,” Judge Nugent said, “with a few exceptions” for meals in fast-food restaurants, savings for retirement, and an occasional visit to a casino.

The debtor had borrowed about $16,000 from 1989-1991 to attend college for two years. Although she paid about $14,000 toward the loans in a succession of three chapter 13 cases, the loans had grown to more than $67,000 with the accrual of interest.

Having completed payments in her most recent chapter 13 plan, the debtor sought to discharge the student loans under Section 523(a)(8). Judge Nugent employed the Brunner test, adopted in the Tenth Circuit, to determine whether she was eligible to discharge the student loans. Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).  

Under an income-based repayment plan, Judge Nugent calculated that $203 a month was the smallest payment for which she would be eligible. Were she to make those payments for the next 25 years, as the program requires, she would end up at age 84 owing more than $152,000, because $203 a month would be $301 a month short of paying current interest. If the remainder were forgiven at the end of the repayment program, she faced the possibility of incurring a nondischargeable tax liability for forgiveness of indebtedness income.

Judge Nugent said that the prospects of a repayment program were “troubling.” He said, “That’s not a fresh start.” He concluded that she could not “maintain a minimal living standard unless a substantial portion of this debt is discharged.”

Although the debtor argued against a partial discharge of the student loans, Judge Nugent felt “bound to consider one on these facts.”

If the debtor were to pay $203 a month, she could pay off the $16,000 principal balance in about 10 years, Judge Nugent said. He said she could “trim her restaurant, recreation and retirement expenses, and perhaps, adjust her tax withholding, to afford paying $200-$300 a month on the principal portion of the debt.”

Judge Nugent found that the debtor had carried her burden of proving that paying anything more than the principal balance would not permit maintaining a minimal standard of living.

Judge Nugent therefore ruled that everything in excess of the $16,000 principal balance would be discharged. He said she “should arrange to make a monthly payment that will amortize the debt over a reasonable 5 to 10-year period.” [Emphasis added.]

Was Partial Discharge the Answer?

Eugene Wedoff, a former bankruptcy judge in Chicago, said he reads Section 523(a)(8) to mean that if “paying the debt under the original loan terms is an undue hardship, then the debt is dischargeable.” Judge Wedoff is the immediate past president of ABI.

In his message to ABI, Judge Wedoff said, “The approach of calculating how much the debtor could afford to pay and then reducing the debt to that amount is something I just don’t see in the statutory language, and this approach diminishes the fresh start, effectively putting the debtor into an all-disposable income regime until the debt is paid.”

For a debtor age 59, a partial discharge may provide relief for only a few years. Living on Social Security after retirement, paying $203 a month could be beyond her means. Then, she might be eligible for an income-based repayment program calling for no payments.

Limits on the Court’s Power

The debtor had already completed her five-year plan and had received her general discharge. Consequently, the bankruptcy court was without statutory power to approve an amendment to the plan, much less impose a repayment schedule extending beyond the end of the five-year term of the plan.

Even assuming that the court could have imposed a repayment schedule on a nondischageable debt, that power presumably would end on completion of the plan.

Therefore, the bankruptcy judge could only make a polite request that the lender accede to his suggestion of about $203 a month rather than demand faster payment.

If the lender does not go along with the suggestion of $203 a month, the debtor might ask the judge to reconsider and discharge the entire debt.

In short, cases such as this demonstrate the statutory limitations on the court when discharging the entire debt is not in the cards.

P.S. Judge Nugent said in a footnote that the cost of internet is not a luxury, “at least not in 2018.”