The way student loans are treated in bankruptcy is an increasingly important issue in the United States. More and more former students, unable to find jobs in a tough economy, are upset by the fact that student loans have acquired a special protected status not available to most other creditors--they can only be discharged on a showing of "undue hardship," a concept without a clear definition. So Vincent Howard and our Corona personal bankruptcy attorneys were interested to see a Seventh Circuit ruling restoring the undue hardship discharge in Krieger v. Educational Credit Management Corp. Susan Krieger of central Illinois won an undue hardship ruling in the bankruptcy court, but Educational Credit Management Corp., acting on behalf of federal loan guarantors, won a reversal in the district court. The Seventh Circuit reversed again, in Krieger's favor.
The court's opinion starts out by noting that Krieger is destitute. At age 53, she lives with her 75-year-old mother in rural Illinois, subsists on government benefits and has no Internet access or reliable car. She has no income and significant assets, but she does have about $25,000 in student loan debt from training as a paralegal. After she filed for bankruptcy, ECMC moved to exempt her loans from discharge, and the bankruptcy court held a trial on whether paying her loans would be undue hardship. In particular, ECMC argued that Krieger had not made a good-faith effort to repay her loans, and that no circumstances suggest Krieger is likely to continue to be unemployed. At trial, the bankruptcy court concluded that Krieger had made a thorough effort to search for work, sending out about 200 applications over the past decade, and had shown good faith by using a large chunk of her divorce settlement to pay down her student loans. On appeal, however, the district court found that Krieger could have searched harder for work, and did not show good faith because she hadn't enrolled in a 25-year deferred payment plan.
The Seventh Circuit noted that the district court doesn't doubt that Krieger has paid as much as she could, and agreed that she can currently pay nothing. The Seventh disagreed with the standard the district court used to determine future ability to repay. It noted that the student loan exemption from discharge is not absolute, the way debts incurred through fraud are; the language permits discharge for undue hardship--a finding of fact for which the bankruptcy court should be given deference. On the issue of whether her poor circumstances would persist, the Seventh also found that this was a factual finding entitled to deference, and not clearly erroneous. In support, it noted that Krieger has not held a job since 1986, when she stopped working in order to raise a family, and did not make much when she did work. Her applications for jobs have been diligent and not limited to paralegal jobs. And the Seventh noted that even if Krieger enrolled in the 25-year repayment plan the district court recommended, that court and ECMC agree that she would likely still make no payments. Thus, it remanded the case with instructions to reinstate the discharge.
Vincent Howard and our Fullerton consumer bankruptcy lawyers are pleased to see this ruling, though sorry that ECMC feels the need to pursue debtors in such a dire situation. The Seventh Circuit's opinion calls her situation "hopeless," and while we would prefer to think she does not feel hopeless, it's certainly a situation that is not likely to lead to the gainful employment she needs. Bankruptcy is designed for people in these kinds of situations--where there is no realistic prospect of being able to pay off debts within a reasonable amount of time. Though this case is about student loan debt, bankruptcy can help anyone with a tough debt situation--and in many cases, more easily than it can help someone whose debt is just from student loans. Even those squeezed by student debt can often get some relief by restructuring their other debts. Vincent Howard and our Chino individual bankruptcy attorneys often help clients look for solutions like this, and tailor our responses to each client's unique circumstances.
Howard Law, P.C., represents all kinds of Californians who are struggling with debts they don't believe they can ever repay. If you'd like to talk to an experienced attorney about a possible bankruptcy, call us today at 1-800-872-5925 or send us an email.