Discharging Student Loans - one success and one failure

In Janice Faye Hopson v. Illinois Student Assistance Commission and U.S. Department of Education, Adv. No. 16 A 206, (Bankr. N.D. Ill. June 22, 2018), the court ruled against a chapter 7 debtor trying to discharge her student loans. The debtor was a 63-year old social worker who asserted that if she were forced to repay her student loans over a ten-year period, she would have to pay $1,111 per month, which was more than she could afford in light of her limited income consisting mainly of social security. The debtor consolidated all of her student loans into one $57,186 Federal Family Education consolidated loan and filed an action to discharge this debt. Between 2014 and 2016, the debtor had temporary social work assignments earning less than $20,000 in 2014, approximately $26,000 in 2015 and just over $20,000 in 2016. In August, 2016, the debtor moved to Georgia for better employment opportunities and started out as a bus driver for Fulton County Community Schools where her average monthly net pay was $1395.86. She then stopped working as a bus driver in August, 2017 when she began working at her current job as a Case Manager with the Georgia Division of Family and Children Services ("DFCS") making a gross salary of $42,816.00 ($2439.83 net monthly income). Her monthly expenses were $2,480.26 per month. During the trial, the Court concluded that the debtor could achieve potential cost savings of approximately $900 per month by, among other things, moving from a 2 bedroom apartment into a one bedroom, stopping 401K contributions and stopping payments on a time share she acquired 15 years ago. In finding the loans non-dischargeable, the court first concluded that with the expense cutbacks discussed in the opinion, the debtor can make monthly payments on her student loans while enjoying a substantial standard of living, which she is now doing. According to the court, the debtor "has not met the first Brunner prong by a preponderance of the evidence that repayment of her student loans would cause her to not have a minimal standard of living." Although not directly relevant to its decision because the debtor failed to meet the first prong of the Brunner test, the court also noted that the debtor's "student loans are currently enrolled in !BR plans - her monthly payments are zero." Further, even if the debtor retired in two years and was limited to social security income, "the drop in income would very likely keep her !BR payments at zero dollars per month." Conversely, in Janees L. Martin v. Great Lakes Higher Education Group, Adversary No. 16–09052 (Bankr. N.D. Iowa February 16, 2018), the bankruptcy court for the Northern District of Iowa ruled in favor of a debtor who was seeking to discharge $230,000 in student loans related to the debtor's bachelor's degree, law degree, and Masters of Public Administration degree from the University of South Dakota between 1989 and 1993. the original principal amount of the loans was $48,000, but grew to over $200,000, as a result of interest. The debtor was 50 years old, she was currently living in South Dakota with her husband, who was 66, and their 2 daughters, 423 and 21. The debtor was unemployed, after losing her last job in 2008. the bankruptcy court found that the Debtor looked for employment more or less continuously after her job. She had applied for hundreds of jobs, law and non-law related, in and around Sioux Falls South Dakota and Sioux City Iowa. In the 9 years since her last job the debtor received only a few interviews and no offers of employment. The bankruptcy court also found that the debtor very much wanted to work and support herself and her family. over the years, the debtor paid a total of $30,077.76 against her student loans, of which $26,040.78 went to interest and the balance to principal. most of the debtor's day was devoted to taking care of her to college-age daughter's and taking care of the household. The debtor and her family depended entirely on her husband's income, whichtotal $39,243 from employment and a pension. The bankruptcy court analyzed the dischargeability issue under the "more flexible totality of the circumstances" test employed in the 8th Circuit, instead of the more commonly used Brunner test. The “totality of the circumstances” test requires the Court to examine the debtor’s undue hardship arguments “on the unique facts and circumstances that surround the particular bankruptcy.” Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702 (8th Cir. 1981). In considering the facts of a particular case, the Court must focus on three factors: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) the debtor’s reasonable and necessary living expenses; and (3) any other relevant facts and circumstances.” Id. The debtor must prove, by a preponderance of the evidence, that excepting her student loans from discharge would impose an undue hardship. In applying the so-called Andrews factors, the bankruptcy court first noted that the debtor testified very credibly that she wants to work and has applied for hundreds of jobs, but she has not received any offers and has been very discouraged by her lack of success, ultimately concluding that "[w]hile it is possible that Debtor will find employment with sufficient income, Debtor’s inability to do so over ten years, while making substantial effort, makes it unlikely she will find such employment. It is even more unlikely that Debtor will find a job with sufficient enough income to make significant payments on her student loan." The bankruptcy court then analyzed whether the debtor's expenses were reasonable and necessary, and concluded they were. The final factor -- the "totality of the circumstances -- issue, weighed in favor of discharge as well. The creditor argued that a discharge was unnecessary because under an income based repayment plan, the debtor's current payment would be -0- per month and her payments would increase only if her monthly income increased to a level allowing her to make payments in the future. Furthermore, under an income base repayment plan, the entire loan would be canceled within 20 to 25 years, depending upon the plan the debtor chose. In rejecting this argument, the bankruptcy court first noted that the availability of an income base repayment plan was just one factor to consider in the totality of the circumstances analysis and did not tilt the scales away from the debtor obtaining a discharge. in this respect, the bankruptcy court noted that the debtor would be 70 or 75 when her debt was ultimately canceled and the tax liability could wipe out all of debtor’s assets not as she is approaching retirement, but as she is in the midst of it. If Debtor enters an income base repayment plan, not only would she have the stress of her debt continuing to grow, but she would have to live with the knowledge that any assets she manages to save could very well be wiped out when she is in her 70s. Ultimately, the bankruptcy court was persuaded by the fact that the debtor made good faith efforts to try to repay the student loans when she was working, but was unable to find employment. Furthermore, her husband’s likely inability to continue supporting the family at his current rate, made it unlikely that the debtor will ever be able to make substantial payments on her student loan under an income based repayment plan. "Comparing the hardships of allowing debtor’s student loan to continue to grow against the likelihood that she will make substantial payments, the Court [found] that the availability of income based repayment plans does not ameliorate the undue hardship Debtor established under the first two factors of the 'totality of the circumstances' test."

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