Monday, July 20, 2015
Courts - Time for redefinition of "undue hardship" re the bankruptcy code?
"Judges Rebuke Limits on Wiping Out Student Loan Debt" is the heading to this important Tara Siegel Bernard column in Saturday's NY Times business section. There is much to learn in this must-read article. Some quotes:
On a typical day in her last job, Janet Roth left home at 4 a.m. each day and drove 40 miles to a tax preparation office in Glendale, Ariz. When she finally got back home, she had less than an hour before starting her 6 p.m. shift decorating cakes at Walmart. She worked until midnight, giving her just a few hours to sleep before starting all over again.ILB: Here is the ILB post on the 2013 7th Circuit opinion in Krieger.
Ms. Roth, 68, worked in many jobs over the years, but she never made quite enough to pay back the $33,000 she borrowed years earlier for an education degree she couldn’t afford to complete, and certainly not the $95,000 it ballooned to in default.
She filed for bankruptcy, wiping out five figures in medical debts. But erasing student loans requires initiating a separate legal process, where borrowers must prove that paying the debt would cause an “undue hardship.”
To prepare her case, she copied down statutes at a local law library and watched episodes of “Law and Order.” Her efforts paid off: Ms. Roth’s loans were discharged in 2013.
That Ms. Roth, now living on Social Security, managed to succeed in what is known as a notoriously difficult process is not even the most remarkable aspect of her case. Instead, the ruling captured the attention of other judges and legal scholars because of a judge’s bluntly worded written opinion that rebuked the widely adopted hardship standard used to determine whether a debtor is worthy of a discharge.
The judge, Jim D. Pappas, in his concurring opinion for the bankruptcy appellate panel decision in the United States Court of Appeals for the Ninth Circuit, said the analysis used “to determine the existence of an undue hardship is too narrow, no longer reflects reality and should be revised.”
He added: “It would seem that in this new, different environment, in determining whether repayment of a student loan constitutes an undue hardship, a bankruptcy court should be afforded flexibility to consider all relevant facts about the debtor and the subject loans.” But the current standard, he wrote, “does not allow it.”
Judge Pappas isn’t the only critic. Although plenty of cases still hew closely to a strict interpretation of the test, some judges and courts have signaled in recent years that they believe the rigid standard — known as the Brunner test — should be reconsidered, even if they are still bound to it now. * * *
Bankruptcy scholars and judges said the test made sense at the time it was adopted because even if debtors could not pass the test, their debts — which were far more modest then — would automatically be discharged in bankruptcy five years after their repayment period started.
But the legal landscape has changed substantially since then. Before 1977, student loans could be discharged in bankruptcy alongside other debts like credit card balances. Congress toughened the law in 1976, adding the five-year period, and again in 1990, when the waiting period was extended to seven years.
In 1998, the waiting period was eliminated. So now, all debtors must prove undue hardship to erase their student debts. (In 2005, Congress added private student loans to the mix of federal education debt that could not be discharged, even though the loans are not backed by the government.) * * *
Another noteworthy case, also from 2013, involved a “destitute” paralegal named Susan Krieger, then about 53, who lived in a rural area of Illinois with her mother, according to court documents. Ms. Krieger received a bachelor’s degree in legal studies and a paralegal certificate, graduating when she was 43. But after a decade-long search, she couldn’t find a job. * * *
[I]t was the written opinion of a well-regarded judge in the Krieger case, questioning the application of the Brunner test, that has been repeatedly cited by other judges. In the ruling, Frank H. Easterbrook, then chief judge for the United States Court of Appeals for the Seventh Circuit, seemed to signal that requiring debtors to prove their futures were “hopeless” was taking the undue hardship standard too far.
He wrote that it was important not to allow “judicial glosses,” like the language in the Brunner case, “to supersede the statute itself.”