01 May Some Student Loan Justice in St. Louis
Wiping out student loans in bankruptcy is rare because the law requires a heavy burden: Proof that repayment creates an “undue hardship” on the consumer. How rare? When a contested hardship discharge was granted in St. Louis late last year, most practitioners could not remember the last time it had happened.
To put this in perspective, the Eastern District of Missouri saw over 10,000 cases filed during 2007, and this is down from the pre-BAPCPA average which approached 20,000 cases annually. And no one can recall the last time a contested hardship discharge plea was granted by our courts. I have written about the high improbability of success before so I thrill to even the smallest crack in the ice.
In a way, the facts of this case are themselves unique. Not unique in the struggles and hardships the debtor has suffered, since her story is all too common. Rather, unique in that Senior Judge David McDonald looked beyond the superficial labels to the consumer’s dire situation — and bleak future.
In this case, the consumer sounds like she was marked out for success and is certainly well-educated. She obtained not only a college degree in French, a Masters in Russian Literature from New York University but eventually a law degree from my alma mater, Washington University. In the interim she had taught at many schools and held numerous jobs in academia. Nevertheless, in 2004 she came to file bankruptcy, burdened with over $71,000 in student loan obligations.
On the surface, it is hard to imagine someone with two graduate degrees — including a law degree — being able to claim repaying the outstanding student loan debts is an undue hardship. But the judge delved deeper. He found that, although graduating from law school, she did so only in the bottom of her class. She had sat for and failed both the Maine and Massachusetts bar exams six separate times. She had only been able to use her law degree for one year while clerking for a Maine trial court. And since failing to pass a bar, could not practice law. The only semi-regular work she was able to obtain was through a legal temporary service. Unable to obtain a teaching certificate, she could not work as a teacher and (more than two decades after studying French and Russian) was no longer proficient in her other training to gain employment. Her history showed she had periodically sought and obtained higher paying jobs but could not retain them for long such that, at the time of trial on her student loan fight, she was unemployed although had averaged about $1,600/month since graduating law school.
Her student loan contractual payment would be $325 monthly. The court found that her average expenses typically exceeded her income. But more importantly, the court concluded she had to prove challenged expenses were reasonable given her circumstances — not that they have been reduced to the bare minimum. Therefore, her rent of $675/month was reasonable even if there was some housing available for less in the region. Her overall modest and austere lifestyle was sufficient without having to be reduced to survival minimums to succeed in her plea.
Perhaps the most important factor in this case was the court’s rejection of the Income Contingent Repayment Plan (ICRP) as a substitute for the law. It has been argued by student loan lenders that a debtor’s ability to fund a reduced payment under the ICRP is sufficient grounds to deny a hardship discharge. This argument has been rejected by the Eighth Circuit Bankruptcy Appellate Panel (most recently in an opinion written by the same judge who heard this case), although such a position has been defended aggressively by the Eastern District’s chief judge less than two years ago in a concurring opinion.
So perhaps Judge McDonald –although semi-retired — is leading the way again. It has seemed courts conflated requiring debtors prove an undue (or excessive) hardship with the higher standard applied to certain medical school loans — that repayment would be an “unconscionable” burden. For example, the only time the ICRP allows for no payment is when a consumer’s income falls below federal poverty line.
The assumption has been that a consumer must prove it is a virtual human rights violation to make even a minimal payment in order to win. And given the added costs of litigating — and the high probability of an appeal plus addition of litigation costs to the debt owed, if discharge is denied — most consumers and their lawyers have come to believe the right to a hardship discharge a chimera. So perhaps the law is beginning to evolve towards a more balanced understanding of what is an “undue” hardship. Such an evolution will be welcome indeed.
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