Vincent Howard and our Chino consumer bankruptcy attorneys have written several recent posts about discharging student loans in bankruptcy. Though the "undue hardship" standard debtors must meet is considered strict, several recent cases have concluded that the debtor met that standard. This may be an outgrowth of the growing outcry over the undue hardship rule itself, which was extended to private student lenders fairly recently and gives them a protection enjoyed by few other unsecured debtors. In In re Janet Rose Roth, the Bankruptcy Appellate Panel for the Ninth U.S. Circuit Court of Appeals ruled in favor of Roth, permitting a discharge of her student loan debt even though the bankruptcy court had denied it. Judge Pappas wrote a relatively long concurrence arguing that the current undue hardship test is too old and narrow and should be changed.
Roth took out 13 federally guaranteed student loans and five direct loans administered by the federal Department of Education. Unfortunately, a family issue not specified kept her from graduating. Her employment history is "long and varied," including many stints of having more than one job at the same time to make ends meet, while also raising four children. She has never made voluntary payments on the guaranteed loans and has defaulted on them; she says she once applied for a forebearance but never heard back. Her wages had been garnished and her tax refunds offset, though Roth was not sure for which lender. She has multiple chronic medical conditions and serious injuries that interfere with work, but applied for hundreds of jobs during a stint of unemployment between 2008 and 2011. She was 62 when she filed for bankruptcy, representing herself, and subsisted on $774 a month in Social Security.
After Roth filed an adversary proceeding seeking to have the loans dismissed, the Department of Education loans were administratively discharged and the others were assigned to Educational Credit Management Services. The bankruptcy court ultimately ruled against the discharge, saying it was constrained by Ninth Circuit precedent requiring consideration of Roth's scant past efforts to address the loans.
Roth appealed, still representing herself. The Ninth Circuit case at issue requires courts to analyze whether the debtor made good faith efforts to repay the loans. After spending rather a lot of time determining the standard of review, the panel found the bankruptcy court made clear error when it decided Roth hadn't made enough good-faith efforts. Its analysis of the factual situation found fault with Roth for not making payments during her "good earning years," but said those payments would still have been modest considering her expenses, and she may have believed the wage garnishment was making payments. Perhaps most importantly, the panel said, Roth didn't enroll in a loan repayment and forgiveness program. This is often enough for a finding of bad faith, the court said, but here, it's likely that she would never have made a payment but faced "disastrous" tax consequences after the loan was forgiven. Finding Congress could not have intended to require a lengthy but empty commitment like this, the panel granted the discharge.
Vincent Howard and our Irvine personal bankruptcy lawyers are pleased with this result. The panel said this was a close case, but we agree with the concurrence that the "good faith" analysis applied here is so old that it no longer reflects the reality courts are dealing with. In fact, the concurrence is an excellent guide to the changes in the student loan discharge landscape since the 1980s: today, nearly all students borrow, and they borrow much larger amounts because education has become much more expensive. At the same time, Congress has taken away a time limit for the exemption from discharge and applied this protection to private student loans, not just government-backed loans. As a result, the "good faith efforts" test pushes many borrowers into a lifetime of debt, the concurrence says. Vincent Howard and our Rubidoux individual bankruptcy attorneys agree that this is too high a standard, particularly given the limited usefulness of certain types of education.
If you're considering a bankruptcy to deal with debt you don't believe you can ever pay off, you should call Howard Law, P.C., today. You can send us a message online or call 1-800-872-5925.
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