Another Bankruptcy Court Rules in Favor of Discharging Student Loan Debt.
Once again, a bankruptcy court has ruled on the subject of the discharge of student debt in Chapter 7 proceedings.
Most recently, Maryland District Bankruptcy Court Judge Michelle M. Harner issued an opinion on factors to consider in determining whether to pay off student loan debt. We have already addressed this subject in two previous legal alerts. [Click here to read our previous legal alerts: Student Loan Debt Discharged in Recent Bankruptcy Court Opinion – Cullen and Dykman LLP (cullenllp.com); Student Loan Debt Discharged in Recent Illinois Bankruptcy Court Opinion – Cullen and Dykman LLP (cullenllp.com)].
So, once again, our attention is drawn to the role of the bankruptcy court as a court of equity that “gives the honest but unhappy debtor a new financial start”. Randall v Navient Sols. (Regarding Randall), AP No. 19-00368-MMH, 2021 WL 2550034 (Bankr. D. Md. June 21, 2021). Previously, we have also touched on the role of fairness in bankruptcy courts in a legal alert. [Click here to read our previous legal alert on equity: Recent Bankruptcy Court Decisions of Statutory Interpretation Reiterate the Importance of Equitable Consideration in Bankruptcy Cases – Cullen and Dykman LLP (cullenllp.com)]
Terry Lucille Randall (“Randall”) is a 68 year old woman who works for minimum wage and lives on a shoestring without overspending. Randall had accumulated a significant debt of about half a million dollars in student loans to finance his studies.
Although she holds various degrees, she has not been able to find a job corresponding to her increased level of education. Over the years, Randall’s hourly wage has ranged from $ 9 to $ 13 an hour. Therefore, after paying his necessary living expenses, Randall had nothing more to give and could not pay off his student loan debt.
The general rule is that a debtor cannot pay off student debt by going bankrupt. However, this does not prevent a debtor from taking action against the student loan provider during its bankruptcy case to dispute the non-payment of student debt. Randall did just that.
As a result of his growing financial difficulties, Randall initiated three adversarial proceedings to pay off his student loan debt, including one against the student loan lender, Navient Solutions (“Navient”). Randall owed Navient about $ 190,000 in unsecured student loans. Randall claimed that she did not have the financial means to pay off the student loan debt. The question was whether Randall could pay off his student loan debt without undue hardship.
While student loan debt is one of the few types of debt that Congress has automatically ruled non-dischargeable in a bankruptcy case, and the courts have set the bar high for showing otherwise, it is not without limits. Student loan debt will be discharged if “except for this discharge debt.” . . would impose undue hardship on the debtor and his dependents. 11 USC § 523 (a) (8) (A) (i).
Many courts, including the Fourth Circuit, have adopted the Brunner test to determine whether a debtor will be under undue hardship. As noted in our previous alerts, under the Brunner test, a debtor must establish: (1) that he cannot maintain, on the basis of his current income and expenses, a “minimum” standard of living for himself and his dependents if he is forced to repay loans; (2) there are additional circumstances indicating that this state of affairs is likely to persist for a significant portion of the student loan repayment period; and (3) they made good faith efforts to repay the loans. Randall, 2021 WL 2550034, at * 6; see also Brunner v. NY Higher Educ. Serves. Corp., 831 F.2d 395 (2d Cir. 1987). Justice Harner determined that Randall met all the elements of the Brunner test.
First, she described Randall’s monthly income and expenses as “thin as a razor” and claimed that asking Randall to pay back all his student loan debt would prevent Randall from maintaining a minimum standard of living.
Second, Harner J. took into account the fact that Randall was 68 years old and only two years away from retirement. If Randall retired, his income would drop dramatically. Additionally, due to the COVID-19 pandemic, the hours available for Randall to work have increased significantly. She was working 40 to 80 hours of overtime due to COVID-19. However, that would eventually fade away. Without this substantial amount of overtime, Randall’s income would still be significantly less per month.
Finally, Justice Harner found that Randall had made good faith efforts to repay his student loan debt. Randall has made payments to Navient and other lenders over the years, asked for forbearances, and even contacted student loan lenders before the payment structures petition.
Ultimately, Justice Harner concluded that requiring Randall to fully reimburse Navient would impose undue hardship. Justice Harner summarized that her findings were based on Randall’s earning capacity, nominal assets, minimum existing expenses, limited opportunities to cut expenses or increase wages, age, fluctuation in overtime. and income in general, and past attempts to repay debt despite its limitations.
Instead of paying off Randall’s student debt in full, Judge Harner balanced the interests of both parties and determined that Randall may be able to pay off some of the debt owed to Navient. In light of the findings summarized above, Justice Harner ordered Randall to repay $ 12,000 of the student loan debt over a 10-year period. However, Justice Harner left open the possibility that Randall’s situation could change in a few years and that the non-dischargeable portions of student debt owed may have to be reassessed later.
Judge Harner notably held that “[t]The Code does not require that a debtor carry nothing but the proverbial barrel to repay her student loans. This quote is in line with the underlying policies of the Bankruptcy Code: offering a fresh start to the debtor.
This decision is another example of the bankruptcy court’s attempt to strike a balance between what is fair for a debtor and what is fair for a creditor or other interested parties. Although Justice Harner did not provide a full windfall to the debtor, she allowed a considerable amount of the debt to be discharged in her favor by ruling that Navient could only receive $ 12,000 out of the approximately $ 190,000 in debt. student debt owed.