Thursday, October 22, 2015
Discharging Student Loans in Oregon Bankruptcy Courts - Part 4 of 5
This post discusses how to meet the third ‘good faith’ prong of the Brunner undue hardship test in Oregon bankruptcy courts.
This is the fourth post of a five-part Q&A series about discharging student loans in Oregon. Prior posts discussed the general rule that student loans are non-dischargeable, reviewed the types of educational debts subject to the general rule, introduced the undue hardship exception, and examined the first and second prongs of the Brunner test.
Q: How do I pass the third 'good faith' prong of the Brunner test?
A: You must prove that you’ve made good faith efforts to repay your student loans.
In Degroot, the Oregon district court considered a number of factors relevant to good faith, including (1) whether the debtor has worked to maximize income and minimize expenses, (2) whether the debtor has made an effort to negotiate a repayment plan, (3) whether the debtor has made any payments on the loan, and (4) the timing of the debtor’s attempt to have the student loan discharged.
In Blackbird, the Ninth Circuit BAP acknowledged that a lack of bad faith is not enough to pass the third Brunner prong. Instead, a debtor must provide actual evidence of affirmative good faith efforts. In Hedlund, the Ninth Circuit held that factual determinations of good faith by a bankruptcy court can only be reversed on appeal in cases of clear error.
Q: Can I pass the third Brunner prong if I’m holding out for a job in my chosen profession?
A: Probably not; you need to work as many hours as possible.
In Mason, the Ninth Circuit ruled that a debtor lacked good faith because he only worked part time as a home siding installer and refused to find a second part time job. The court rejected the debtor’s argument that working more hours would make it more difficult for him find a full time career. The court was also critical of his refusal to make more than one attempt to pass the bar exam. In Ristow, the Ninth Circuit BAP found a lack of good faith, in part, based on a debtor’s refusal to work for less than six figures in her chosen field upon graduation. 2012 Bankr. LEXIS 1289 (9th Cir. BAP Mar. 26, 2012).
In Birrane, the Ninth Circuit BAP found a lack of good faith because a debtor was underemployed and no evidence suggested she was willing to take a second job outside her chosen field. The court reasoned that she could have used her knowledge as a dance instructor to teach private lessons but chose not to.
Q: Can I pass the third Brunner prong if my spouse isn’t working?
A: Yes, so long as you’ve made all attempts to maximize your income and reduce expenses.
In Hedlund, the Ninth Circuit ruled that a debtor passed the third Brunner prong because although his wife didn’t work full time, he made good faith efforts to increase his income, was “well-placed for his skills”, and had unsuccessfully applied for two higher-paying jobs. The court recognized that the debtor’s failure to pass the bar exam after three tries was not “within his control.”
Q: Do I have to take a higher paying job in another city to pass the third Brunner prong?
A: No, so long as any potential increase in wages would be offset by increased costs of living.
In Heldlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong because although higher paying jobs might have been available outside of Klamath Falls where his family lived, any potential salary increase would be offset by increased living expenses.
Q: Must I request an unemployment deferment to pass the third Brunner prong?
In Roth, the Ninth Circuit BAP acknowledged that whether a debtor has sought deferments or forbearances may be indicative of good faith. In Pena, the Ninth Circuit allowed debtors to pass the third Brunner prong, in part, because they requested an unemployment deferment rather than immediately file bankruptcy.
Q: Can I meet the third Brunner prong if I didn’t apply for a repayment plan before filing bankruptcy?
A: Possibly, so long as you wouldn't have qualified.
In Jorgensen, the Ninth Circuit BAP ruled that a debtor’s failure to accept a repayment plan does not necessarily equate to bad faith.
In Roth, the Ninth Circuit BAP reasoned that a repayment plan’s terms, duration, and future tax and credit consequences must be considered in determining whether a debtor’s refusal to accept a repayment plan was reasonable. The court allowed the debtor to pass the third Brunner prong even though she never applied for a repayment plan because she mistakenly believed she would not qualify. Her failure to apply was also mitigated by the fact that her repayment amount would have been zero. The court reasoned that the law doesn’t require a party to engage in futile acts, and the debtor could have faced potentially disastrous tax consequences at the end of her 25 year repayment period.
In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong even though he never applied for an income contingent repayment plan (“ICRP”). The court based its decision, in part, on the debtor’s good faith determination that he didn’t qualify for ICRP because his loans were in default. In Kelly, the Ninth Circuit found that the third Brunner prong was met because although the debtor never applied for loan repayment options, she had a good faith belief that she was ineligible. 594 Fed. Appx. 413, (9th Cir. 2015). In Gray, the Oregon bankruptcy court allowed a debtor to pass the third Brunner prong because although he didn’t apply for an ICRP, there was no guarantee his loans would qualify for such a program. 2006 Bankr. LEXIS 4230 (Bankr. D. Or. June 19, 2006).
However, in Mason, the Ninth Circuit found a lack of good faith, in part, because a debtor didn’t pursue ICRP options with diligence. In Cianciulli, the Oregon bankruptcy court found a lack of good faith because a debtor failed to enroll in an ICRP before filing bankruptcy, even though he didn’t qualify for ICRP at the time of trial. 2005 Bankr. LEXIS 1129 (Bankr. D. Or. June 7, 2005).
Q: Can I meet the third Brunner prong if I reject a repayment option offered just before trial?
A: Potentially, so long as the repayment option was clearly not affordable.
In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong even though he rejected three pre-trial repayment options offered just before trial. The court reasoned even the 30-year, $300 per month options offered were still more than he could afford.
However, in Birrane, the Ninth Circuit BAP ruled that a debtor failed the third Brunner prong because she failed to take any steps to renegotiate a repayment schedule under an ICRP before trial. Although she was denied for an ICRP before filing bankruptcy, the court was persuaded by the fact that she failed to re-apply or make any payments after filing bankruptcy. Based on the student loan company’s promise that she would qualify for $141 payments and receive a discharge after 25 years, the court refused to discharge her debts through bankruptcy. In Degroot, the Oregon district court recognized that a debtor must continue making good faith efforts to repay student loans, even after a bankruptcy is filed. The court ultimately ruled that the debtor lacked good faith by failing to apply for an ICRP during her bankruptcy proceedings. In Ristow, the Ninth Circuit BAP held a debtor failed the third prong in part because she rejected applications for ICRP out of fear her husband would become obligated for the payments. 2012 Bankr. LEXIS 1289 (9th Cir. BAP Mar. 26, 2012).
In Rosen, the court recognized that although the good faith requirement may continue up until trial, it does not go on indefinitely. The court ultimately refused a student loan company’s request to abate its decision on dischargeability by six months to avoid infringing on the debtor’s fresh start.
Q: Can I meet the third Brunner prong if I haven’t made any payments on my student loans?
A: Potentially, so long as your failure to make payments was beyond your control.
In Jorgensen, the Ninth Circuit BAP ruled that good faith requires proof a debtor made efforts to repay her loans, or proof that forces preventing repayment were beyond her control. In Birrane, the Ninth Circuit BAP held that whether a debtor has a history of making or not making payments is not necessarily dispositive of whether the third Brunner prong is met.
In Rosen, the Oregon bankruptcy court allowed a debtor to pass the good faith prong because although he didn’t make any payments on his student loans, his disability limited his ability to work. In Hedlund, the Ninth Circuit allowed a debtor who made only one voluntary $950 payment on his student loans to pass the third Brunner prong. Although his voluntary payments were minimal, he had paid 16 months of uncontested wage garnishments prior to filing bankruptcy. In Roth, the Ninth Circuit BAP held that a debtor’s lack of payments was not in bad faith because she was simply unable to pay due to garnishments and tax refund offsets outside of her control.
However, in Williams, the Ninth Circuit ruled that a debtor lacked good faith, largely because he failed to make any student loan payments from the time he took out his loans until the time he filed bankruptcy. 9 Fed. Appx. 696 (9th Cir. 2001).
Q: Can I pass the third Brunner prong if I repaid other debts instead of my student loans?
In Pena, the Ninth Circuit ruled that debtors acted in good faith even though they used back disability benefits to pay down a large amount of general unsecured debt instead of repaying a relatively smaller amount of student loan debt.
Q: Can I pass the third Brunner prong if my wages were garnished to repay my student loans?
A: Probably, if the garnishment was uncontexted.
In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong, in part, because he allowed his student loan creditor to garnish his wages without objection for 16 months prior to filing bankruptcy.
Q: Can I pass the third Brunner prong if I file bankruptcy shortly after my student loans come due?
A: Probably not.
In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong, in part, because he had waited four years after receiving his student loans to file bankruptcy. The court compared the debtor to the student in Brunner, who filed bankruptcy in bad faith just one month after her first student loan payment became due. In Kelly, the Ninth Circuit allowed a debtor to pass the third Brunner prong, in part, because she paid thousands of dollars toward her student debt over an eight-year period before filing bankruptcy. 594 Fed. Appx. 413 (9th Cir. 2015). In Roth, the Ninth Circuit BAP was persuaded by the fact that the debtor waited over a decade after her loans became due to file bankruptcy.
However, in Degroot, the Oregon district court found a lack of good faith because the debtor filed bankruptcy shortly after receiving her student loans.
The last post in this series will discuss how income contingent repayment plans work, when to ask for a partial discharge of student loans, chapter 13 options, the statute of limitations on student loans, how to handle student loan collector harassment, and the ability to seek redetermination of dischargeability if circumstances change.
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