Kristin Price, a single mother of three young children, won an important victory in a Pennsylvania bankruptcy court last month. On June 23, Judge Eric Frank issued an opinion discharging all of Ms. Price’s federal student loans–approximately $26,000. This is another win for the good guys.
Price v. DeVos and the U.S. Department of Education: A single mom files for bankruptcy
At the time of trial, Ms. Price was 29 years old and had three children ages 3, 5 and 11. Although she was still married, she was separated from her husband and anticipated a divorce.
Price obtained a Bachelor of Science degree in Radiology Science from Thomas Jefferson University in 2011, financing her studies with federal and private loans. At the time of trial, she worked part-time as a vascular sonographer but was unable to find full-time work in her field. She testified she could obtain a second part-time job working outside her field but the additional child care costs did not justify getting another part-time job.
Price received informal child support from her estranged husband, but her reasonable expenses still exceeded her income. She testified that she lived with her mother in return for paying her mother’s mortgage payment–about $1400 a month.
At the time Price filed her adversary complaint in the bankruptcy court, she owed nearly $26,000 in federal loans and $30,000 to Chase Bank. Price settled with Chase prior to trial. Thus the only issue before Judge Frank was whether Price was entitled to have her federal loans discharged.
Judge Frank applied the three-part Brunner test to rule for Ms. Price
Judge Frank applied the three-part Brunner test to decide Price’s case. The Department of Education conceded that Price passed the first prong of the Brunner test; she could not pay back her federal loans and maintain a minimal standard of living.
The Department also conceded that Price passed Brunner’s third prong. It acknowledged that she had handled her student loans in good faith.
But DOE argued that Price could not pass Brunner’s second prong. According to DOE, Price could not show additional circumstances making it likely that her financial situation would not improve “for a significant portion of the repayment period of the student loans.” Basically, DOE maintained that Price was young and healthy and was qualified for a good job in the medical field. Eventually, DOE pointed out, Price’s children would grow up and leave the home, which would enable Price to get a better job and repay her student loans.
And here is where Judge Frank’s opinion gets interesting. Price argued that her future financial prospects should be considered for no longer than the remaining period of her 10-year loan repayment obligation, which ended in 2024. DOE argued that Judge Frank should consider Price’s financial prospects for a much longer time–the 20- or 25-year period of an income-based repayment plan.
Fortunately for Price, Judge Frank did not buy DOE’s argument. The judge ruled that Price had rejected a long-term income-based repayment plan in good faith; and thus he would consider her financial prospects based on the terms of her ten-year repayment obligation and not the 20 or 25 years DOE requested.
Judge Frank said he was obligated to consider Price’s future financial prospects based on “specific articulable facts, not unfounded optimism.” If he were required to consider Price’s financial situation over a 20- or 25-year term, Judge Frank reasoned, his determination “[would] be nothing more than mere guesswork, without any reasonable degree of certitude.”
Moreover, Judge Frank pointed out, DOE’s own expert testified that DOE’s 20-year REPAYE program was ill-suited for Price and that he would not recommend it for her. Judge Price also noted that a REPAYE plan would require Price to consolidate her debt, which would cause accrued interest to be capitalized into a larger loan balance–meaning she would be “paying interest on interest.”
If Price’s meager income did not improve significantly in later years, Judge Frank explained, her loan would eventually “reach a kind of ‘escape velocity,'” meaning that her monthly payments would not be enough to cover accruing interest and her loan balance would grow “for the next several decades.”
Based on this analysis, Judge Frank then considered what Price’s financial prospects would likely be over the next five years–about 70 percent of the remaining repayment period. The judge concluded Price would probably be unable to pay back her loans over that period.
In short, after applying the second prong of the Brunner test to Price’s financial outlook, the judge discharged all of Price’s federal loans.
Without question, the heart of Judge Price’s ruling was based on his conclusion that Price had rejected a long-term payment period in good faith. And of course, his decision was made a lot easier due to the fact that DOE’s own expert admitted that a long-term repayment plan was not appropriate for her.
What does the Price decision mean for other overburdened student-loan debtors?
Judge Frank’s Price decision is significant for at least three reasons:
First, this is the most recent in a string of bankruptcy court decisions that have discharged student-loan debt owed by single mothers with dependent children. Price follows in the wake of Lamento, Acosta-Conniff (on appeal), Fern, and McDowell–all decisions involving single mothers with children who won discharges or partial discharges of their student loans.
Second, this is the latest in a series of very well-reasoned bankruptcy court decisions in which bankruptcy judges have worked hard to grant relief to overburdened debtors within the harsh constraints of the Brunner test. Judge Frank’s decision was 25 pages long; Judge Berger’s decision in the Johnson case out of Kansas was extensively researched. The Abney decision, the Fern decision, and several more have displayed remarkable intellectual agility and commendable commitment to the bankruptcy courts’ core purpose, which is to grant overburdened debtors a fresh start in life.
Third, Judge Frank ruled that when a court applies the second prong of the Brunner test to determine whether a debtor’s financial prospects will improve in the future, the appropriate time period for consideration is the original term of the loan (generally 10 years) rather than the extended term of a hypothetical 20-year or 25-year income-based repayment plan.
Admittedly, Judge Frank’s conclusion on this last point is a little fuzzy. Price had refused to sign up for a long-term, income-based repayment plan, and Judge Frank ruled that Price’s decision to reject such a plan had been made in good faith. Judge Frank might have ruled differently if Price had signed up for a 20-year REPAYE plan before filing for bankruptcy.
Indeed, the judge wrote that the “outcome may well be different in other cases in which the extended loan repayment programs present a more attractive option, or for other appropriate reasons.” And the judge also noted that DOE did not dispute the fact that Price’s decision to reject a long-term repayment plan had been made in good faith.
In the final analysis, all we can say for sure about the Price decision is this: A healthy 29-year old mother of three children with good future job prospects won a bankruptcy discharge of her student loans based primarily on the fact that her judge did not think Price would be in a position to repay her loans over the next five years.
Personally, I would have liked the Price decision better if Judge Frank had said that a student-loan debtor’s financial prospects should always be limited to the term of the original student loan–generally no more than 10 years. That’s not what the judge ruled. Nevertheless, it is a good decision for student-loan debtors.
Acosta-Conniff v. ECMC [Educational Credit Management Corporation], 536 B.R. 326 (Bankr. M.D. Ala. 2015), reversed, 550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).
Richard Fossey & Robert C. Cloud. Tidings of Comfort and Joy: In an Astonishingly Compassionate Decision, a a Bankruptcy Judge Discharge the Student Loans of an Alabama School Teacher Who Acted as Her Own Attorney. , July 20, 2015. ID Number: 18040.
In re Lamento, 520 B.R. 667 (Bkrtcy. N.D. Ohio 2014).
Price v. U.S. Department of Education, ky. No. 15-17645 ELF, Adv. No. 16-0011, 2017 Bankr. LEXIS 1748 (Bankr. E.D. Pa. 2017).
McDowell v. Educational Credit Management Corporation, 549 B.R. 744, 774 (Bankr. D. Idaho 2016).