Day: 2013/04/19

IBR Makes Contact With the Bankruptcy Code

I have a confession to make: I like reading appellate court opinions and thinking about the issues they discuss. Maybe I should’ve gone to law school or something. I don’t collect them like comic books, but it’s a rare perk of blogging that I get to read one every once in a while.

Today’s adventure is Krieger v. Education Credit Mgmt. Corp., (7th Cir. 2013) (No. 12-3592), a bankruptcy case appealed from federal district court. The district court reversed the bankruptcy court’s finding that denying discharge of plaintiff-appellant Susan Krieger’s student loans would constitute an “undue hardship.” In a compassionate move, the Seventh Circuit sided with Krieger, allowing her discharge.

The opinion was written by law and economics powerhouse Frank Easterbrook, who baldly opens with, “Susan Krieger is destitute.” There are other nuggets like when he echoes anti-neoliberal zealot Michael Hudson (somewhat uncharacteristic of a Chicago-school type):

[I]t is worth recollecting that Educational Credit concedes (as the bankruptcy judge found) that Krieger simply cannot pay. She is essentially out of the money economy and living a rural, subsistence life. She does not have assets or income and, the bankruptcy judge found, is not likely to acquire any. Krieger at 2.

Krieger (53), who lives with her 75-year-old mother, hasn’t held a job since 1986, and before then she’d only earned $12,000 in her lifetime. She owed $25,000 in student loan debt for a paralegal degree she obtained more than a decade ago, and she applied to 200 jobs since then to no avail.

Debts that cannot be repaid, will not be repaid.

This opinion exists because Congress never bothered to define the circumstances constituting an “undue hardship.” 11 U.S.C. § 523(a)(8) (2012). The pertinent statute reads:

(a) A discharge [in chapter 7, 11, 12, and 13 bankruptcy] does not discharge an individual debtor from any debt—

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—


(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Why is “undue hardship” undefined? Because until President Clinton signed the Higher Education Amendments of 1998, section 8 read:

(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless –

(A) such loan, benefit, scholarship, or stipend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or

(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor’s dependents.

In other words, one only needed to show an “undue hardship” if her loan had been in repayment for fewer than seven years before the petition date. After that, student debt was treated no differently than credit card debt. Note also that nonprofit institutions (e.g. Access Group) were also shielded from debtors well before private institutions received the same protection in 2005.

The 1998 amendment was passed with extraordinary bipartisan support (Ron Paul voted against it), which suggests that no one bothered to think about the consequences of permanent government-backed student loan debt. The primary such consequence is that for student debtors who wish to include their student loans in their bankruptcy petitions, their fates are basically in the hands of a federal bankruptcy judge. Or Article III federal judges, going up the line, as is the case here. The circuits have, I think, three different tests for determining an “undue hardship.” The circuit you live in could mean the difference between discharge and debt peonage.

Thus, in Krieger, the debtor pretty much threw herself at the mercy of the federal courts, and thankfully they ultimately sided with her. In the trial over the dischargeability of the debt, the bankruptcy judge wrote:

Never has the Court seen such utter futility be the result of a debtor’s job search efforts. Krieger at 5.

(How many times have you read comments on scamblogs, Above the Law, and elsewhere of people who’d sent out 700 or more resumes in a handful of years rather than 200 in ten years?)

I don’t want to dive too deeply into the minutiae of the “undue hardship” test that the Seventh Circuit uses, but its third prong requires the debtor to show that she has “made good faith efforts to repay the loan.” The district court believed the debtor didn’t meet this requirement.

So law school gunner, answer me this lest I Socratic cold-call you: Does the debtor’s decision not to sign on to Income-Based Repayment mean she has failed to meet the good faith requirement?




No, writes Easterbrook, who argues that logically IBR’s existence does not repeal § 523(a)(8).

[T]he judge concluded that good faith entails commitment to future efforts to repay [i.e. IBR]. Yet, if this is so, no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve. Section 523(a)(8) does not forbid discharge, however; an unpaid educational loan is not treated the same as a debt incurred through crime or fraud. The statutory language is that a discharge is possible when payment would cause an “undue hardship”. It is important not to allow judicial glosses, [like the “undue hardship” test], to supersede the statute itself. Krieger at 4. [Emphasis original]

But what makes Krieger an even bigger bellwether over IBR is the concurrence by Judge Daniel Anthony Manion. It’s really only a concurrence in the loosest sense: He agrees with the bankruptcy judge’s determination that the loan is dischargeable only because the standard of review the Seventh Circuit is using requires a showing that the bankruptcy court’s decision was “clearly erroneous,” which Manion happens to believe is not the case.

Otherwise, Manion warns that a successful discharge of $25,000 by someone who is in good health “should be labeled as an extreme exception and an outlier” because with student debt growing to “crisis” (his words) levels, he’s afraid that debtors will flock to the bankruptcy courts instead of signing on to IBR. Krieger at 9.

What I don’t get is if Manion thinks people who are in good health and are IBR-eligible at $0 per month shouldn’t be able to discharge their loans, then why did he not find the bankruptcy court’s ruling “clearly erroneous”? How is Krieger an exception? Why is this not a dissent?

While I don’t think this is the first time a student loan bankruptcy case has encountered IBR, I’m pretty sure it’s the highest-profile example, so I’m going to call it Bankruptcy 1, IBR 0. Although it’s still a factual matter left to the mercy of bankruptcy judges, they have more leeway to side with a debtor than if the debtor were seriously injured but ineligible for an administrative hardship discharge by the Department of Education. Destitution is enough.