Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Sunday, December 20, 2015

Undue Hardship Discharge Prevails Over Income Based Repayment Defense

While the U.S. Department of Education has made a history in the last few decades by taking the stand that student debtors who file for bankruptcy be required to agree to some form of income-based repayment plan, a recent case has poked a big hole in that hot air balloon defense!

Settled on November 10th, 2015, Abney v. United States Department of Education, Michael Kevin Abney, prevailed in his Adversary Proceeding under 11 U.S.C. §523(a)(8) proving undue hardship and successfully discharged nearly $38,000.00 in principle and interest for four years of education even though he did not earn a degree.

Michael Abney, age 40, is a divorced delivery truck driver living on a net income per month of just $1,183.00. Mr. Abney is at or near the poverty level for sure; over the life of his loan, he has been homeless, for a time living in the cab of his truck.  Abney has been hospitalized for stress and treated for depression, and currently does not own a car, his monthly expenses outweigh his income by a negative $203.00 a month - which most likely is a gross understatement of his true financial condition?

Abney was not trying to get out of paying for his education!  In fact he paid $11,000.00 before falling into default status on the original loan amount stated as approximately $25,000.00.  Life events hit Mr. Abney like a tidal wave.  Unable to graduate with a degree, Abney divorced and paying child support, had to find work to maintain a minimalist way of life.  Costly divorce and child visitation fights and costly legal fees regarding these litigation efforts, along with medical bills and a default judgement owed to Bank Of America, forced Abney into Bankruptcy with nearly $116,000.00 in unsecured debts.

The bankruptcy case was filed in the Eighth Circuit which applied the Totality of Circumstances Test in order to justify the proof of Undue Hardship.  Under that test the court looks at these factors: "(1) Total present and future incapacity to pay debts for reasons not within the control of the debtor; (2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment; (3) whether the hardship will be long-term; (4) whether the debtor has made payments on the student loan; (5) whether there is permanent or long-term disability of the debtor; (6) the ability of the debtor to obtain gainful employment in the area of study; (7) whether the debtor has made a good-faith effort to maximize income and minimize expenses; (8) whether the dominate purpose of the bankruptcy petition was to discharge the student loan; and (9) the ratio of student loan to total indebtedness" Yes, nine (9) criteria must be met in this test!

And yet, Abney prevailed under the Totality of Circumstances Test.  Perhaps because the Department of Education (DOE) was bent on getting Abney to agree to an Income-Based Repayment Program?   While the Eight Circuit Court has frequently agreed with the DOE stating that "the availability of the IBRP is a factor to be considered", this time, the court "rejected the DOE's argument that the mere availability of the IBRP made it impossible for Mr. Abney to show undue hardship.... (h)olding that eligibility for a program such as IBRP ipso facto leads to denial of an undue hardship would deprive the Court of the discretion granted by §523(a)(8)."

There!  The Court took a stand against the Behemoth known as the DOE - and at least in this case, has taken back its discretionary right to decide against a plan that provides no "Fresh Start" for the debtor; the judge making these conclusions: "Mr. Abney (has) established the unlikelihood that he would ever have sufficient income to enable him to pay anything toward the student loans. With respect to (the) hardships engendered by the IBRP (program) the Court (finds) :1) participation would require Mr. Abney to 'rehabilitate' the loans with nine monthly payments of more than $5; 2) there was potential harm to Mr. Abney's credit rating and access to employment and housing by virtue of the continued existence of the unpaid debt; 3) the debt would continue to accrue interest, and; (4 even if the debtor successfully completed the IBRP and had the debt forgiven, he would suffer the tax consequences of debt forgiveness which would not apply if the debt were discharged in bankruptcy. 
To the extent that the debtor might be able to put away money for retirement, the tax consequence of debt would eliminate that possibility." (emphasis added)

As a final pin prick into the DOE's balloon, the Court said: "Mr. Abney (has) made every effort humanly-possible to pay his child support and student loans.... the mere availability of the IBRP is of no help to the debtor's current or future situation but, rather imposes additional burdens on him". (emphasis added)

AMEN!  Can I get an Amen?

Source:  National Consumer Bankruptcy Rights Center, dated December 14, 2015.

1 comment:

  1. Thanks for helping get the word out about the Abney case, yet another federal decision that has rejected the Department of Education's arguments that almost no student loan can be discharged in bankruptcy due to the income-based repayment option. Increasingly, the federal bankruptcy courts are becoming aware that IBRPs are futile for many debtors and that the psychological and emotional costs of long-term repayment plans make them unsuitable for people in bankruptcy--especially for older debtors.


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