The 9th Cir. BAP on student loans in bankruptcy: Where no payments are forecasted, failure to negotiate a repayment plan is not a factor showing bad faith.
More on student loans in bankruptcy: On April 16, 2013, the Ninth Circuit Bankruptcy Appellate Panel decided the case of Roth v. Educational Credit Management Corporation. The case involved an analysis of the third, “good faith” prong of the “Brunner Test” (determining the dischargeability of student loans in bankruptcy), which requires:
- That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; and
- That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- That the debtor has made good faith efforts to repay the loans.
Judge Renn, writing for the Court, laid out the factors considered in determining if a debtor has met the third prong: Had the debtor made any payments prior to seeking discharge? (No.) Had the debtor sought deferments or forbearances? (No.) Was the action timed in a “rush to the courthouse”? (No.) Did the debtor’s financial condition result from factors beyond her control? (Yes.) Had the debtor tried to obtain employment, maximize income, and minimize expenses? (Yes.) Had the debtor attempted to negotiate a repayment plan? (No.)
This last factor, which often tips the good faith balance against a debtor, was the most significant. (Ms Roth had refused to enroll in ECMC’s “income-based repayment plan.”) The Court concluded that this refusal should not count against her, given her age, poor health, and limited income or prospects:
‘[W]e see no real purpose in making Debtor jump through the hoops of applying for, and enrolling in, the IBRP and then reporting her income every year. The IBRP was set up to allow borrowers to pay an affordable amount toward retirement of their student loan debt. However, when absolutely no payment is forecast, the law should not impose negative consequences for failing to sign up for the program. This is consistent with the general maxim that the law does not require a party to engage in futile acts. … Congress could not have intended such a lengthy, empty commitment as a requirement for a determination of undue hardship.”
In a scathing concurrence, Judge Jim D. Pappas called the Brunner test “a relic of times long gone,” one that “is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so.” He recommended that the Ninth Circuit craft an undue hardship standard that allows bankruptcy courts to consider all the relevant facts and circumstances on a case-by-case basis to decide if the debtor can currently or in the near future afford to repay the student loan while maintaining an appropriate standard of living.