Judges Rebuke Limits on Wiping Out Student Loan Debt - The New York Times
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.
Ms. Roth, 68, worked in numerous jobs over the years, but she never made quite enough to pay back the $33,000 she borrowed years earlier for an education measure 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 native law library and watched episodes of ?Law and Order.? Her efforts paid off: Ms. Roth?s loans were discharged in 2013.
A guide to student loans at various universities, and what it takes after commencement to repay that debt.
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 new years that they believe the inflexible standard ? known as the Brunner test ? should be reconsidered, even if they are still bound to it now.
?The world has changed,? said Michael B. Kaplan, a federal bankruptcy judge for the District of New Jersey, who criticized the standard in an opinion article. ?Certainly, the costs of education and the level of student loan indebtedness has exploded.?
Because the bankruptcy code never defined ?undue hardship,? the courts needed to develop their own definition. Most courts adopted the Brunner test, which originated from a precedent-setting ruling in 1987, in which a woman named Marie Brunner filed for a discharge of her debt less than a year after she completed a master?s degree.
To stop debtors from trying to prematurely cancel their debts, the case laid out a three-pronged test: Individuals must prove they made a good-faith effort to pay the loan by finding job and minimizing their expenses. Debtors must also show they could not maintain a minimal standard of living based on their income and expenses if they had to repay the debt.
But then, in arguably the most challenging prong, the court must consider whether that situation is likely to persist for a significant part of the repayment period ? which essentially requires the judge to foretell the debtor?s future, ensuring what some courts have described as a ?certainty of hopelessness.?
?How do you prove things won?t change for the better in the future?? said Daniel A. Austin, associate professor at Northeastern University School of Law.
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.)
?You can see why courts would have developed a harsh standard in those cases where consumers had sought discharge of loans soon after they came due, without waiting five or seven years,? said John Rao, a lawyer with the National Consumer Law Center. ?But it is kind of ridiculous to be applying the alike standard now when there is no longer a correct to an automatic discharge.?
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 measure in legal studies and a paralegal certificate, graduating when she was 43. But after a decade-long search, she couldn?t find a job.
The Educational Credit Management Corporation, the guaranty agency hired to battle student debtors in court, argued that Ms. Krieger should enroll in an income-based repayment program, even though she probably wouldn?t end up paying anything. Ms. Krieger?s remaining balance of about $25,000 was eventually discharged.
But it 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.?
Rafael I. Pardo, a bankruptcy law professor at Emory Law, said Judge Easterbrook?s opinion was a reminder to other courts that carried a lot of weight. ?If this highly respected, highly cerebral conservative judge is saying this, that is a big deal,? he added. ?It is a clarion call that some judges should be more forgiving when applying the law.?
Judge Easterbrook and Judge Pappas weren?t the first to criticize the Brunner standard. That distinction may belong to Judge James B. Haines Jr., who spent 25 years as federal bankruptcy judge in Maine before retiring in 2013. In an opinion in 2000, he said that some courts reach too far in trying to define undue hardship.
He said he never felt shackled by Brunner?s three-prong test because the higher court in his jurisdiction never adopted that standard, leaving him free to consider another standard, whereby judges can consider the ?totality of the circumstances.?
?Throughout my time on the bench, I heard numerous student loan cases,? said Judge Haines, now a professor at Maine University School of Law. ?The totality of the circumstances test gave me sufficient structure, with a reasonable ability to balance all pertinent facts.?
Many of those facts have become more dire over the last decade. Among debtors filing for bankruptcy with student loans, the average amount of student debt has doubled to nearly $31,000 in 2014 from $15,350 in 2005, according to an analysis by Professor Austin of Northeastern. But maybe more important, student loans as a percentage of the filer?s annual gross income have also increased substantially. In 2014, 16 percent of all bankruptcy filers had student loans that totaled more than 50 percent of their annual income, compared with 5.4 percent in 2005.
This year, President Obama instructed several governmental agencies to review, by Oct. 1, whether the treatment of student loans in bankruptcy should be altered. Congress could tweak the bankruptcy code, maybe reinstating a waiting period before debts can be canceled. Judge Kaplan, in New Jersey, said perhaps 10 or 15 years was the right number. Otherwise, the existing hardship standard could be overridden if a circuit court hears a case en banc, meaning all of the judges in a circuit decide together.
All of those are long shots, for the time being. A larger part of the problem is that only a tiny percentage of debtors try to discharge their student loans in bankruptcy, perhaps because of the perception that it isn?t possible or is too hard.
A version of this article appears in print on July 18, 2015, on page B1 of the New York edition with the headline: Chained to Unpayable Debt. Order Reprints| Today's Paper|Subscribe
