On May 22, 2013, the 9th Circuit Court of Appeals released its opinion in Hedlund v. The Educational Resources Institute, Inc., and Pennsylvania Higher Education Assistance Agency, Case 12-35258 (D.C. 6:11-cv-6281AA). That opinion (and other pending decisions) may have made it a little easier on student loan debtors to have their student loans discharged in bankruptcy. (Cue the HOORAYs!!!)
The path to this decision was a long long long (long) path. In 1997, Michael Hedlund graduated from law school and started preparing for the bar exam in Oregon. While he attended law school, part of that school was financed with student loans. And, as is typical, the repayment of those loans was supposed to begin about 6 months later. During that initial 6 months, Mr. Hedlund obtained a temporary job at the county district attorney’s office. Also during that six months, Mr. Hedlund waited for the results of the Oregon bar exam. He unfortunately did not pass the bar. Mr. Hedlund retook the bar in February 1998, but unfortunately did not pass that exam either. As a result, he was unable to continue employment as a deputy district attorney and found employment as a juvenile counselor. Life continued on and he married and became a father by 2001.
By January 1999, the loans were set to enter repayment; however Mr. Hedlund was able to obtain hardship forbearances. Through a variety of events, he was eventually declared to be in default on both of his loans and the entire $80,000 was declared due from one lender. He attempted to negotiate lower payments with no success. By 2002, Pennsylvania Higher Education Assistance Agency (PHEAA) began garnishing his paycheck; then in May 2003, the other student loan creditor The Educational Resources Institute (TERI) also began garnishing his paycheck (yes, two garnishments at one time). At that point, Mr. Hedlund filed for bankrupty protection. In June 2003, Mr. Hedlund filed an adversary proceeding to determine whether his student loans should be partially discharged. He settled with TERI prior to trial and agreed to pay $17,718.15 at $50/month. PHEAA did not settle.
After trial, the bankruptcy court granted a partial discharge of all but $30,000 of the PHEAA debt (discharging approximately $50,000). PHEAA appealed the matter to the Bankruptcy Appellate Panel (BAP). The BAP reversed the bankruptcy court’s decision and reinstated the debt. Mr. Hedlund then appealed the BAP decision to the 9th Circuit Court of Appeals, and….the Court of Appeals sent it back to the Bankruptcy Court.
The Bankruptcy Court heard arguments but before a decision was reached, the assigned judge died. A new judge was assigned and Judge Brandt ruled that all by $32,080 was discharged of the PHEAA debt. And PHEAA appealed again, this time to the Oregon District Court (another option for appealing a decision). The Oregon District Court reversed the Brandt decision and reinstated the PHEAA loan. Mr. Hedlund again appealed.
The 9th Circuit Court of Appeals looked at the Brunner test (the usual standard on whether a student loan debt is/should be dischargeable as explained by my colleague, Kent Anderson). There are three steps (or prongs) to the Brunner test and the bankruptcy court had considered those prongs:
1. The debtor has made efforts to obtain employment, maximize income, and minimize expenses
2. The debtor’s efforts to negotiate a repayment plan; history of payments; and timing of the attempt to discharge the debt
The 9th Circuit found that the bankruptcy court had examined the efforts and applications for better jobs (as testified to at trial) and found the efforts commendable and the expenses (including cell phones) were mostly reasonable, but any unreasonable expenses were not enough to create bad faith. The Court also ruled that the Bankruptcy Court had examined the debtor’s efforts to negotiate a payment plan and the only option that PHEAA had offered was a very large payment, which would create undue hardship and would create an obligation that would last into his senior years (Mr. Hedlund was approximately 35 at the time and PHEAA payment plans were each 30 years long, making Mr. Hedlund 65 years old and paying off student loans).
When the 9th Circuit looked at the District Court’s findings that Mr. Hedlunds expenses were immoderate and that he had not negotiated enough, the Court found that the only standard that was applicable in order to reverse the Bankruptcy Court’s decision was “clear error” and the Oregon District Court heard the matter “de novo”. The difference between the two is that the District Court pretty much retried the case based on the evidence in front of it (that’s “de novo”, Latin for “from the beginning”; and the “clear error” review only allows a appellate court to make a finding when there is clearly an error of law as applied to the facts. Therefore, the District Court was wrong.
The 9th Circuit Court of Appeals then turned to the record before it and analyzed whether the Bankruptcy Court had committed any “clear error”. The 9th Circuit found that the bankruptcy court had not made any errors, had examined the evidence, had used the Bruner test, and therefore, the reversal by the District Court was wrong. The Court then remanded back to the District Court to reinstate the discharge ordered by the Bankruptcy Court.
Whew! What does that mean? Nearly 10 years after the first lawsuit brought by Mr. Hedlund to determine dischargeability, a decision was reached that helps student loan debtors in bankruptcy.
It means that in the Hedlund case, where he had made about 4 years of payments on one of his loans and about $950 on the other, that that effort was reasonable. He worked; his wife didn’t. That was reasonable. He had mostly reasonable expenses, including a cell phone. Reasonable expenses can include maybe unreasonable expenses. The Court did not find that it was necessary to move to another location due to the low pay and underemployment Mr. Hedlund had obtained, his efforts to find employment were reasonable. Most of all— Mr. Hedlund did not have to accept the Income Contingent Repayment Program payment with a 30 year term and $300-400/month payments as he would be paying for his own college at age 65 years old at the same time that his children were starting college. That is a huge difference in how student loan repayment plans have been pushed onto debtors in bankrupty. Debtors do not have to go to extreme efforts to repay; debtors must make reasonable efforts and a 30-year term may not be reasonable.
In one of my recent articles here on Bankruptcy Law Network, I discussed Elizabeth Warren’s first bill presented to Congress — on this very subject of the unfair treatment that student loan debtors receive as opposed to bank debtors. The Consumer Financial Protection Bureau has issued a report on the matter of private student loans and compared student loans to mortgages as the repayment terms are often similar. Much more needs to be done and there may well be another appeal in this case. But for now, student loan debtors have a reason for hope!
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Last modified: May 23, 2013