Student Loan Servicer Wolves

24 Aug Student Loan Servicer Wolves

Debtors who successfully convince the court that they meet the stringent three-part Brunner test for hardship discharge of student loans may not be out of the woods if their loan servicer is Educational Credit Management Corporation also known as ECMC.

ECMC is the default servicer for loans in bankruptcy in a long list of states, and serves as the primary servicer for Stafford and Plus loans in Virginia and Oregon. It is chartered as a nonprofit corporation that, according to its website, exists to provide a unique range of services to students, schools and lenders participating in the Federal Family Education Loan program. That appears to be just part of the wooly mantel for this wolf.Despite the generous and expansive language on the website, ECMC’s main function appears to be to relentlessly collect student loan payments for the commercial lenders who tendered the loans in the first place, and their assignees.

Three recent U.S. Court of Appeals decisions ruled against ECMC in cases where a bankruptcy court discharged a debtor’s student loan obligation and ECMC appealed. In all three cases no question existed concerning the debtor’s ability to meet the first part of the Brunner test: present inability to make student loan payments and maintain a minimal standard of living. ECMC argued that these individuals had not fulfilled the requirement of making good faith efforts to repay the loan (the second prong of the Brunner requirement) because they had not attempted to file for an income-contingent repayment plan, notwithstanding the fact that their incomes had been too low to allow for any meaningful repayment for most of the elapsed life of the loan. The company further disputed the evidence presented to the bankruptcy court supporting the third Brunner requirement: the likelihood that inability to repay was long term and not due to the debtor’s voluntary choices.

Two of the cases involved chronic medical problems. In ECMC vs Kedric Dante Mosley (US App. 11th Circuit 06-10349, August 9, 2007, appeal from 330 B.R. 832, 2005, N.D. Ga.), the student suffered a back injury during R.O.T.C. training which left him in chronic pain. The injury left him unable to do heavy physical work and the medication he takes for pain and depression impair his mental functioning. He is homeless and survives on food stamps and disability income from the Veteran’s Administration. Citing Barrett (seq.), the court rejected ECMC’s argument that the debtor was required to produce expert medical testimony documenting his disability. In Thomas Francis Barrett Jr. vs ECMC (487 F3d 353, US App. [6th Circuit], June 8, 2007), the debtor, who had a masters degree in health administration, developed Hodgkins lymphoma and chronic avascular necrosis shortly after graduation in 2000, requiring, respectively, a lengthy course of chemotherapy and repeated surgeries. Ongoing treatment for the second condition severely limited his ability to work in any capacity; mounting medical bills prompted filing for bankruptcy. Part of his case for continuing inability to repay student loans rested on the reluctance of employers to consider hiring a person with his history of serious medical problems; a problem likely to surface repeatedly in bankruptcy cases as older downsized workers find themselves in competition with recent graduates. The arguments in this case concerning income contingent repayment plans will be the subject of a separate blog and that have now been replaced by the new income based repayment plans.

The third case, ECMC vs. Ali Reza Mandighomi No 05-56042, 9th Circuit, June 8, 2007, upheld the student loan discharge of a man who borrowed money to obtain an MBA in the hopes of securing a job which would support a wife who is unable to work outside of the home and four small children. Despite diligent attempts to seek work in his field while working 70 hours a week at two low-paying jobs, he was unable to maintain a minimal standard of living while making loan payments. This unpublished case deserves careful scrutiny, as a cooling economy and oversupply of college graduates in so many hitherto fairly lucrative fields make it probable that significant hardship in the face of an able-bodied graduate’s best efforts to obtain employment in his or her field will become increasingly prevalent, especially among debtors with dependent children.

A search through recent appellate decisions revealed several other less egregious cases in which the U.S. Court of Appeals either ruled in favor of ECMC or reopened the case. There is no ironclad definition of hardship, and the court held that ECMC’s objections to discharge, considering the totality of circumstances, were valid under the bankruptcy statutes. Whether they justified the company’s contention that they serve the interests of student borrowers is another matter. In the three cases above, however, the actions of ECMC pretty clearly constitute an attempt to use technicalities to deny people in truly desperate circumstances the protection afforded by even our current lender-friendly bankruptcy laws, perpetuating a cycle of misery and hopelessness for the benefit of lenders and a private, albeit “nonprofit” default servicer.

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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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