If you want a good cry, read the latest installment in the eight-year saga by a single mother of two teenage children with $112,000 in student loans. She was morbidly obese, suffered from diabetes, had maxed out her meager salary as a high school teacher, and had negative disposable income after the scant expenses of her spartan lifestyle.
The unfortunate debtor was able to feed herself and her children only because she received considerable financial assistance from her parents.
The debtor has been through two trials in bankruptcy court and three appeals, including one in the Eleventh Circuit. Bless his heart, Bankruptcy Judge William R. Sawyer of Montgomery, Ala., stuck to his guns and wrote an opinion for the second time discharging the student loans.
On the brink of discharging student loans for a second time, the hapless debtor would not have been where she is today were it not for pro bono counsel fees worth significant six figures provided by Catherine Steege and Carl N. Wedoff of Jenner & Block LLC and retired Chicago Bankruptcy Judge Eugene R. Wedoff.
Without pro bono counsel, this debtor never would have discharged her student loans. And it is still not clear that she will, because the lender may appeal again. This writer submits that something is wrong with a system that requires a debtor to go through so much for so long and with no chance of success were it not for the generosity of distinguished lawyers from the top ranks of the bankruptcy bar.
If This Isn’t ‘Undue Hardship,’ What Is?
The debtor took on student loans to earn four degrees, including a Ph.D. in special education. Her aspirations for being a school administrator never panned out, perhaps because of her health problems. She had tenure but was already at the top of the pay scale, looking forward to salary hikes that would only cover inflation.
The debtor filed a chapter 7 petition in 2012 and received her general discharge. She filed a pro se complaint to discharge her student loans in 2013 under Section 523(a)(8). In early 2015, Judge Sawyer wrote his first opinion discharging the student loans as imposing an “undue hardship.” In re Acosta-Conniff, 536 B.R. 557 (M.D. Ala. 2015).
On appeal, the debtor was representing herself. The district court reversed and directed entry of judgment excepting the student loans from discharge.
Even though the bankruptcy judge had found that the teacher’s income was unlikely to increase substantially in the future, the district judge said that the debtor must “ultimately bear the consequences of her decision to obtain loans in order to pursue her multiple educational goals.” The district judge appeared to say that student loans will not be discharged if incurring the debt was within the debtor’s control. See ECMC v. Acosta-Conniff, 550 B.R. 557 (M.D. Ala. 2016). To read ABI’s report on the district court reversal, click here.
Represented by pro bono counsel, the debtor appealed to the Eleventh Circuit and won a reversal. In re Acosta-Conniff, 686 F. App’x 647 (11th Cir. 2017). To read ABI’s report, click here.
The circuit court laid out 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.
Reversing, 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.” Id. at 650.
The appeals court remanded 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 of the legal conclusions.
District Court Decision on Remand
Having been reversed by the circuit, the district judge ruled on remand that the bankruptcy court must determine whether a student loan debtor is eligible for an income-contingent repayment plan, or ICRP.
Although the Eleventh Circuit has not yet ruled on the issue and there is a split of authority in the lower courts, the district judge believed that the bankruptcy court must always decide how much a debtor would be obligated to pay under an ICRP. The student loans will not be discharged, the district court said, if lowering payments under an ICRP would enable the debtor to maintain a minimal standard of living. ECMC v. Acosta-Conniff, 583 B.R. 275 (M.D. Ala. 2018). To read ABI’s report, click here.
On remand to the bankruptcy court, the debtor was represented by pro bono counsel once again. She won in bankruptcy court for a second time when Judge Sawyer discharged her student loans in a September 29 opinion.
Debtor Can’t Repay Student Loans in Any Amount
Although the Eleventh Circuit has not passed on the issue and the lower courts differ, Judge Sawyer followed the district court’s mandate to decide whether the debtor could sustain a minimal standard of living while paying under an ICRP. It was clear, as Judge Sawyer explained, that the debtor could not repay the student loans in full.
So, Judge Sawyer once again slogged through a line-by-line dissertation of the debtor’s income and expenses. He accepted the lender’s testimony that an ICRP would cost about $350 a month.
Reviewing the evidence in laborious detail, Judge Sawyer decided that the debtor’s take-home income per month was some $3,500, including about $500 in child support. Expenses came to $3,725, leaving the debtor with a shortfall of $225 a month. Judge Sawyer explained that the debtor covered the deficiency with financial support from her parents.
Finding that the debtor’s budget didn’t fully cover home repairs, furnishings and clothing, Judge Sawyer concluded that the debtor had minimized her living expenses.
Because the ICRP would cost $350 a month, the debtor would be $575 a month short of being able to cover the ICRP. Judge Sawyer said that “undue hardship” does “not require a debtor to sacrifice basic needs to fund an ICRP.”
Under the first Brunner test, Judge Sawyer therefore held that the debtor could not maintain a minimal standard of living if forced to repay the loans with an ICRP attached.
Judge Sawyer said that the debtor passed the second Brunner test, regarding a continuation of the state of affairs, because the debtor was at the top of the pay scale with little chance of promotion given her health condition. He also said she was not required to move to a larger city in search of higher pay because she would give up tenure at her current job. Further, higher pay elsewhere would be consumed by higher costs of living in a bigger town.
The third Brunner test is good faith.
The debtor had won five forbearances and one deferment and was in forbearance at the time of trial. Judge Sawyer held that failure to enroll in an ICRP “is not per se bad faith.” Furthermore, the debtor had good reason not to enroll because she could not repay the student loans in any amount.
Judge Sawyer ended his opinion by expressing his view that considering an ICRP “violates Brunner” and “is contrary to” Section 523(a)(8). He discharged the loans because the debtor could not make any payments under an ICRP “and maintain a minimal standard of living.”
If you want a good cry, read the latest installment in the eight-year saga by a single mother of two teenage children with $112,000 in student loans. She was morbidly obese, suffered from diabetes, had maxed out her meager salary as a high school teacher, and had negative disposable income after the scant expenses of her spartan lifestyle.
The unfortunate debtor was able to feed herself and her children only because she received considerable financial assistance from her parents.
The debtor has been through two trials in bankruptcy court and three appeals, including one in the Eleventh Circuit. Bless his heart, Bankruptcy Judge William R. Sawyer of Montgomery, Ala., stuck to his guns and wrote an opinion for the second time discharging the student loans.
On the brink of discharging student loans for a second time, the hapless debtor would not have been where she is today were it not for pro bono counsel fees worth significant six figures provided by Catherine Steege and Carl N. Wedoff of Jenner & Block LLC and retired Chicago Bankruptcy Judge Eugene R. Wedoff.