In a circuit that permits discharging a portion of student loans, Bankruptcy Judge Peter C. McKittrick of Portland, Ore., discharged part of a debtor’s student loan debt, “which she has no hope of repaying during her lifetime.”
To prevent the debtor from being “swallowed up by massive student loan debt,” Judge McKittrick allowed the debtor to discharge all but $16,500 of her $51,800 in private student loans.
The opinion is remarkable in at least two respects. First, the debtor, an attorney, was neither disabled nor unemployed. Indeed, she was earning about $64,000 a year. Second, the creditor’s status as a private lender worked in favor of the debtor. Judge McKittrick discharged most of the debt because the lender had the right under state law to garnish one quarter of the debtor’s wages, leaving her to “drown from the weight of her necessary monthly living expenses.”
The Debtor’s Predicament
The debtor was a 38-year-old single woman with no dependents. She graduated from law school in 2008 but was initially unable to find legal employment. In 2014 she found work with a small firm providing criminal defense for indigents. Judge McKittrick said she was “probably near the top of her earning potential.”
The debtor had no nonexempt assets, owned no real estate, drove a seven-year-old car, and had neither retirement accounts nor retirement benefits from her employer.
In addition to the private student loans, the debtor owed almost $200,000 on government-guaranteed student loans. She had agreed to an income-based repayment plan on the government-guaranteed loans costing her $479 a month. At the end of the 20- to 25-year repayment timetable, Judge McKittrick calculated that the debtor would still owe a significant balance that would be discharged.
The debtor had paid more than $18,000 toward the private student loans. According to Judge McKittrick, the debtor “had amassed significant credit card debt” while “trying to pay for normal living expenses and stay current on her student loans.” She commenced an adversary proceeding to discharge some or all of the private loans after obtaining a chapter 7 discharge.
After trial, Judge McKittrick concluded that the debtor had a negative monthly income of $474 after payment of expenses, including debt service on the government-guaranteed loans.
Judge McKittrick explained that the private lender had effectively obtained a judgment for the entire amount owed by the debtor. As a result, the lender had the right under Oregon law to garnish one quarter of her wages. Although the lender said it might reach an “accommodation” with the debtor, Judge McKittrick said that any concession to avoid garnishment would be “subject to the unilateral discretion of the [lender] because these are private student loans.”
The Brunner Factors
The Ninth Circuit has adopted the three-part Brunner test. Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987).
In his August 23 opinion, Judge McKittrick concluded that the debtor satisfied the first test: Can the debtor maintain a minimal standard of living while repaying the loans? He reasoned that her budget, even with “further trimming,” could not support garnishment by the private lender, make payments on the government-guaranteed loans, and still maintain a minimal standard of living.
The second part of Brunner requires the persistence of the state of affairs for a “significant portion of the repayment period.”
Even if she could increase her income, Judge McKittrick said the debtor satisfied the second test because she could not pay her monthly living expenses and her government loans if the private lender were to garnish her salary.
The third Brunner test requires a good faith effort at repaying the student loans.
Judge McKittrick found the debtor in good faith because she took on credit card debt to repay her student loans, cashed out a small 401k to pay student loans for the same reason, and had paid down the student loans by more than $18,000.
How Much to Discharge?
Judge McKittrick decided that the debtor satisfied the Brunner tests and was entitled to discharge student loans “largely because [she] cannot survive if [the private lender] garnishes her wages.” Given the lack of an income-based repayment program, the judge still had to determine how much the debtor was entitled to discharge.
Judge McKittrick decided that the debtor could reduce her monthly expenses by $150 a month. He also calculated that 110 months was the repayment period on the private loans. He therefore discharged all but $16,500 of the private loans, to be repaid at the rate of $150 a month for 110 months without interest.
Observation
On the bottom line, the debtor will be paying $629 a month on student loans out of monthly gross income of $5,333, assuming she remains healthy and employed. The student loan debt service will be her single largest expense, according to Judge McKittrick’s analysis of her expenses.
To this writer, it appears that the debtor will never become a homeowner and will have little or no savings in the years to come. If the debtor incurs unexpected expenses, she will be destitute. Who doesn’t incur unexpected expenses?
What’s wrong with this picture? Is this how Americans are supposed to live if they tried (unsuccessfully) to better their lives through education?
In a circuit that permits discharging a portion of student loans, Bankruptcy Judge Peter C. McKittrick of Portland, Ore., discharged part of a debtor’s student loan debt, “which she has no hope of repaying during her lifetime.”
To prevent the debtor from being “swallowed up by massive student loan debt,” Judge McKittrick allowed the debtor to discharge all but $16,500 of her $51,800 in private student loans.
The opinion is remarkable in at least two respects. First, the debtor, an attorney, was neither disabled nor unemployed. Indeed, she was earning about $64,000 a year. Second, the creditor’s status as a private lender worked in favor of the debtor. Judge McKittrick discharged most of the debt because the lender had the right under state law to garnish one quarter of the debtor’s wages, leaving her to “drown from the weight of her necessary monthly living expenses.”
The debtor was a 38-year-old single woman with no dependents. She graduated from law school in 2008 but was initially unable to find legal employment. In 2014 she found work with a small firm providing criminal defense for indigents. Judge McKittrick said she was “probably near the top of her earning potential.”
The debtor had no nonexempt assets, owned no real estate, drove a seven-year-old car, and had neither retirement accounts nor retirement benefits from her employer.
In addition to the private student loans, the debtor owed almost $200,000 on government-guaranteed student loans. She had agreed to an income-based repayment plan on the government-guaranteed loans costing her $479 a month. At the end of the 20- to 25-year repayment timetable, Judge McKittrick calculated that the debtor would still owe a significant balance that would be discharged.