Earned Income Credit Seized to Pay Student Loans

13 Nov Earned Income Credit Seized to Pay Student Loans

Bankruptcy discharge was denied for student loansbecause the debtor failed to claim a tax benefit. After her earned income credit was seized to pay her student loans, a mentally and physically disabled mother of two became disheartened and stopped applying for it. The US Bankruptcy Court in the Northern District of Ohio, Western Division, ruled that her failure to apply for the earned income credit constituted bad faith, and used this as a basis to deny her a hardship discharge. Dyer-White v. United States Department of Education (2007 Bankr. Lexis 2886), decided August 27, 2007, is a shocking exercise of judicial callousness.

The Dyer-Whites are married, and have two children, aged two and five at the time of the bankruptcy.Mr. Dyer-White’s employment history was spotty andhe had been unemployed for eighteen months at the time the family filed for bankruptcy.Mrs. Dyer-White, the student loan borrower,was disabled. Herdisabilities, for which she has been receiving SSI benefits since turning eighteen, included dyslexia, learning disabilities, and depression, and physical restrictions including limitations on overhead lifting. She did not graduate from high school, but eventually obtained a GED. In 1996 and 1997 she borrowed $11,897.22 to attend the University of Toledo, a public institution, but was unable to pass most of her classes, despite being diligent in the attempt. At the time she filed bankrupcy, she worked part time, on an irregular schedule, as a helper at Daimler-Chrysler.

The vague description of her employment in the written opinion suggests that she was working in a position created specifically for handicapped individuals. Her two children also receive SSI benefits. According to the bankruptcy schedules, the total family income for this family of four, including food stamps, was $1580/month, and total expenses, when adjusted for the fact that they were no longer making mortgage payments since their home had been foreclosed, and didn’t need much of a clothing budget since most of their clothing was provided by charity, was $1821. The Dyer-Whitefamily annual income of $18,960 was 29% of the Ohio median income for a family of four.

So how did the court conclude thattjosdebtor could afford to make student loan payments from a discretionary income of minus $241? In 2001, a year in which she and her husband both had employment income, they filed for and received $3,195.15 in earned income credit. The earned income credit is only available to working families with children and was designed specifically to encourage people to get off the welfare rolls. The entire amount of her earned income credit was attached and applied to Mrs. Dyer-White’s delinquent student loans, leaving the family in worse shape than they would have been had neither parent been working, since their welfare benefits were adjusted downward to reflect employment income and the earned income credit was intended to supply the deficit in the family budget. Is it any wonder these debtorslost interest in working and subsequently failed to file income tax returns?

Ironically, this undischarged student loan, incurred, most probably, when well-meaning social workers encouraged additional education as a tool to escape a cycle of poverty and dependence, has become a powerful tool for keeping a family inpoverty and dependent on state aid by eliminating any advantage to be gained from obtaining employment. Is this an isolated example? Probably not, considering that the maximum amount of Pell grants, the main source of outright subsidies to very low income students, does not cover tuition and fees at most public colleges. Moreover, even with diligent effort on the student’s part coupled with conscientious advising, some of those students will fail their studies, and others will obtain credentials which convey no advantage in the workplace.

The only winners in this scenario are the lenders, who continue to accrue interest on a government protected student loan which long since became unpayable. I personally think that there are clear legal errors in this court’s application of the Brunner Test (itself of questionable validity), and grave moral errors, involving elementary compassion for the poor, in their interpretation of undue hardship, but even leaving aside legal and moral errors, the cost to the public purse of siphoning off poverty program money into the pockets of lenders ought to be a public issue of immediate concern.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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