People paying attention to bankruptcy news throughout the country may have heard about two debtors who successfully discharged their student loans in chapter 7 this year. Typically, seeking a discharge of education debt is difficult to accomplish because debtors must prove that without a discharge they would suffer an “undue hardship.” This requirement came into existence in 1978 when Congress restricted the dischargeability of student loans based on fears of highly paid professionals wantonly wiping out their debts after graduation.
The two cases, Krieger v. Education Credit Management Corporation (ECMC) (PDF) in the Seventh Circuit (Illinois) and Roth v. ECMC (PDF) in the Ninth Circuit (California) are noteworthy because in both cases, ECMC argued that the debtors should have been required to sign onto the federal government’s Income-Based Repayment (IBR) program. IBR is a recent innovation created by the 2007 College Cost Reduction Act. It caps monthly payments as a fraction of what debtors would pay under a 10-year repayment plan, based on debtors’ incomes. Unpaid interest does not capitalize onto principal so long as the debtor’s income is too low to qualify for the 10-year repayment plan (called a “partial financial hardship”). After 25 years (20 years for recent graduates), the government cancels any unpaid loan balance and interest, but debtors must pay income tax on the forgiven sum.
In Krieger, the Seventh Circuit Court of Appeals reversed a lower court’s decision finding the loans nondischargeable because the debtor was obligated to sign onto IBR. The appellate court held that if this were true, then no one could discharge their student loans under chapter 7. Similarly, in Roth a bankruptcy appellate panel noted that previous Ninth Circuit decisions had required debtors to sign on to IBR, but because of the debtor’s age and the likelihood that her income was so low she wouldn’t make single payment, the panel found the debt to be nondischargeable.
New Yorkers live in the Second Circuit, not the Seventh or Ninth, but the good news is that last year a bankruptcy court in the Western District of New York ruled on a similar case and came to the same conclusion. In Bene v. ECMC (boy they’re unpopular) (PDF), the debtor borrowed $16,931 to attend Canisius College in the 1980s, but she dropped out to take care of her parents. After working full-time on an assembly line for 12 years for $10.67 per hour, she was laid off. Her debt had swollen to $56,000. At 64, she filed bankruptcy. Like Krieger and Roth, the bankruptcy court rejected ECMC’s argument that the debtor was obligated to “indenture herself to the William D. Ford Program for the next 25 years,” as the court put it.
However, although the courts in these cases all agreed that not signing on to IBR itself shouldn’t preclude dischargeability, other factors needed to be considered. All three debtors were older and unlikely to pay much of anything to their student loan creditor before the debts were canceled. Younger debtors might not be so fortunate.
Because the dischargeability of student loan debt is decided on a case-by-case basis, hiring an experienced New York bankruptcy lawyer is of paramount importance.
For answers to more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
