Court verdict offers hope for student loan debtors
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Student loan debtors eyeing bankruptcy relief for their college debt have a cause to celebrate after a recent court victory. A United States bankruptcy court in Iowa just granted a full discharge of student loans in a case that reflects a growing judicial shift on undue hardship and student debt.
The potential landmark case was an adversary proceeding attached to a bankruptcy case titled In Re Martin. The court found the debtor sufficiently demonstrated undue hardship and was entitled to a full discharge despite a bitter protestation from the loan servicer.
Take a look at this case and what it might mean for you if your student loans are unaffordable.
The Martin bankruptcy case
Janeese L. Martin was in her 50s when she filed bankruptcy in Iowa and owed more than $230,000 in student loans. The original principal of the loans she took for college was less than $49k. The debt skyrocketed from compounded interest on the unpaid balance.
Martin’s loans originally came from Great Lakes Higher Education Guaranty Corporation while she pursued a Bachelor’s, Juris Doctorate, and Master’s degree from the University of South Dakota in the late 80s and early 90s.
Martin’s lawyer argued these facts to persuade the court of her undue hardship circumstances:
- She worked from 2000-2008 then lost her job during the upheaval of the recession
- She was largely unemployed since 2008 despite continually seeking employment
- She applied unsuccessfully for hundreds of jobs both in and outside of her degree field
- She paid $30k towards her initial $48k of student loans, but interest consumed the payments
- She, her husband, and college-aged daughter live on the husband’s salary of less than $40k
- She is 50+ and her primary earning years are behind her with little chance to do better
- She made a good faith effort to gain employment and repay her student loans
After graduating in 1993, the debtor consolidated the loans, and Educational Credit Management Corporation (ECMC) became her servicer.
ECMC’s Argument Against Discharge
As is customary with federal loan servicers fighting an adversary proceeding, ECMC pushed to force Martin to retain the debt despite compelling arguments that clearly demonstrate undue hardship.
ECMC told the court that Martin’s unemployment was voluntary, as her degrees qualify her for a well-paying job. The servicer also argued that Martin shouldn’t be awarded student loan discharge because she could simply apply for an Income-Driven Repayment plan and get a $0 payment.
Tax Consequences of Discharge vs. Forgiveness
Under ECMC’s recommendation, Martin could qualify for an IDR payment of as little as $0. After 20-25 years on this plan, the government would forgive her remaining balances. The problem is that her balances would continue to grow month after month.
With payments of $0, interest would accrue, then compound, then accrue and compound again in an escalating debt cycle. By the time Martin qualified for forgiveness, her debt would have spiraled out of control and might well creep towards the $1 million mark.
With government-forgiven student loans, there are income tax consequences. Even at a modest 15% income tax rate, that would trigger a tax bill of $150k which would be oppressively unaffordable and cause a subsequent financial crisis for the debtor.
Her attorney argued that she was already facing undue hardship from the student loans and the forgiveness option would pose a greater hardship. The court agreed that the “totality of circumstances” in her case met the standard of undue hardship and discharged her debt.
Student Loans and Bankruptcy
There is a growing trend by judges and the current administration to reconsider the rigors of undue hardship and increase opportunities for student loan discharge in bankruptcy. The Department of Education is pursuing a study of undue hardship and invited input from many stakeholders.
If you can't afford your student loans, North Carolina bankruptcy might be a feasible option for you. To find out more about student loans and bankruptcy, contact the experts at the Law Offices of John T. Orcutt.
Read reviews from our clients and then call 1-888-234-4181 to schedule a student loan bankruptcy consultation with our experts. Come to see us at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.