A Western District bankruptcy judge has found that a debtor’s non-dischargeable student loan obligation is a “special circumstance” that can overcome the statutory presumption of abuse when a higher-income debtor attempts to eliminate financial obligations under Chapter 7 of the U.S. Bankruptcy Code.
Chief Judge Carl Bucki’s recent decision in In re Jeffrey Howell and Rebecca Howell, 11-12685, is the latest in a plethora of rulings on an issue that has divided courts all over the country. Bankruptcy judges in Alabama, Illinois, Indiana, Delaware, Oklahoma and Georgia have reached the same conclusion as Bucki; judges in Pennsylvania, Ohio, Arizona, Kansas and New Hampshire have come to the opposite conclusion.
The debate centers on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which sought to make it more difficult for debtors to obtain bankruptcy relief and to steer them into Chapter 13 repayment plans rather than Chapter 7 liquidations. Under Chapter 7, most debts are simply eliminated. In Chapter 13, the debtor pays a portion of the debts over a three- to five-year plan in full satisfaction.
With the new law, a debtor seeking Chapter 7 relief whose monthly income is higher than the median income of his or her state is subject to a “means test” to determine if he or she is capable of paying at least a portion of the debts. If so, the debtor’s attempt to eliminate the debts under Chapter 7 is presumptively abusive.
The presumption can be defeated only if the debtor can demonstrate the existence of “special circumstances” that prevent him or her from having the disposable income to fund a Chapter 13 repayment plan. Courts have differed on whether a student loan is a special circumstance, with some judges finding that student debts are too ubiquitous to constitute anything “special” under the statute.
In the Howell case, the debtors sought bankruptcy relief because they could not pay their student loans along with their other unsecured obligations. They report disposable monthly income of $697 and student loan obligations totaling $658.
“[I]f the student loans were paid from the calculated amount of current monthly disposable income, the debtors would have access to less than $40 per month for payment of all other unsecured obligations,” Bucki wrote. “A surplus of such limited amount would surely not suggest an abusive filing.”
Bucki found that the Howells do not have an extravagant lifestyle, living in an $81,000 home with a remaining $55,000 balance and driving vehicles that are 10 and seven years old.
“With the possible exception of future income tax refunds, the schedules show no significant non-exempt assets,” Bucki wrote. “Mr. and Mrs. Howell made no large purchases on the eve of bankruptcy, and aside from the student loans, they have declared no outrageous amount of unsecured debt.”
Bucki noted that student loans are non-dischargeable in either Chapter 7 or Chapter 13, so the college debts would linger whether the Howells’ other debts were eliminated through Chapter 7 or paid down under Chapter 13. He observed that while a Chapter 13 bankruptcy would stay collection efforts of the student loans while the repayment plan was active, interest on those loans would continue to accrue and the Howells would end up owing more on those obligations after obtaining bankruptcy relief than before.
“The magnitude of the student loans will…compel substantial payments over an extended period of time, without hope for any deferral,” Bucki wrote. “For the very reason that they cause the presumption of abuse to yield a conclusion that reclassifies what we should otherwise fairly view as a non-abusive filing, the debtors’ non-dischargeable student loans constitute special circumstances.”
Bucki’s finding conflicts with that of several judges who have considered the same issue, including Bankruptcy Judge Eric Frank of the Eastern District of Pennsylvania. Frank, in In re Harmon, 446 B.R. 721 (2011), said that if Congress had intended to include non-dischargeable debts—such as student loan obligations—among allowable expenses, “it would have been simple enough to do so.”
“In the absence of some textual support in the Bankruptcy Code, I fail to see how a student loan repayment constitutes ‘special circumstances’ based solely on its status as a nondischargeable debt,” Frank said.
Jill Zubler of Buffalo appeared for the U.S. Trustee, which sought to dismiss the Howells’ Chapter 7 petition as abusive. She declined comment.
The Howells were represented by Thomas Steffan of Cooke & Steffan in Alden, Erie County.
Steffan said he is increasingly seeing debtors whose primary problem is student loan obligations which are usually not dischargeable in bankruptcy. He said debtors forced into a Chapter 13 plan to repay other debts while interest accrues on their student loans often emerge from the process further in debt, subverting the “fresh start” reflected in the bankruptcy clause of the U.S. Constitution.
“These are not people who were taking advantage of the system,” Steffan said, referring to his clients.
Bankruptcy courts are increasingly dealing with student loan issues as judges struggle with whether those debts are dischargeable and under what circumstances. The Bankruptcy Code, at 11 U.S.C. §523(a)(8)(B) permits the discharge of student loans if the obligation imposes an “undue hardship” on the borrower or dependents, but does not define what “undue hardship” means (NYLJ, July 17).
Meanwhile, a report this week by Pew Research Center showed that 19 percent of American households had college debt in 2010—twice as many in 1989 according to the Associated Press.
@|John Caher can be contacted at email@example.com.