Self-Inflicted Disability Won’t Make Student Loans Dischargeable, BAP Says

July 10, 2019

Hardship resulting from a self-inflicted disability (conviction for a felony) won’t justify discharging student loans, according to the Ninth Circuit Bankruptcy Appellate Panel.

A man incurred almost $260,000 in student loan debt from attending law school and obtaining a masters degree in taxation. Working as a revenue agent for the Internal Revenue Service, he conducted an audit saving the taxpayer $1 million in taxes.

The IRS agent solicited a $20,000 bribe, telling the taxpayer he needed the money to pay student loans. Fearing the IRS agent would not submit paperwork to complete the audit, the taxpayer paid the bribe, but only after notifying criminal authorities who witnessed the illegal transaction.

The IRS agent was convicted of bribery and given a three year prison sentence. While incarcerated, he filed a chapter 7 petition along with a complaint to discharge the student loans, which represented almost all of his debts.

The debtor argued that disbarment following his criminal conviction meant he would never be able to land a job paying enough to service the student loans. To show his good faith effort at repaying the debt, the debtor said that he had been current on the loans until he was indicted.

Bankruptcy Judge Timothy W. Dore of Seattle ruled that the loans were nondischargeable, saying that the debtor’s financial condition resulted from factors within his own control.

For the BAP, Bankruptcy Judge Julia W. Brand wrote an opinion on June 26 upholding the nondischargeability of the student loans.

To discharge the student loans, the debtor was required to show “undue hardship” under Section 523(a)(8). Judge Brand said that the Ninth Circuit has adopted the three-part Brunnertest for establishing undue hardship. See Brunner v. N.Y. State Higher Education Services Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987).

After release from prison, the debtor testified that he had applied for 40 jobs but got only one interview and no job offers. The debtor argued that his prior payments on the student loans satisfied his burden of proof to established compliance with the third part of the test: good faith efforts to repay the loans. Judge Brand disagreed.

Judge Brand cited other courts for the proposition that the “lack of earning potential caused by the debtor’s choice to engage in criminal conduct and subsequent incarceration were not factors beyond the debtor’s reasonable control, and that such factors can preclude a finding of good faith under Brunner.”

Judge Brand elaborated. The debtor was a licensed attorney, she said, who knew that his conduct was criminal and could result in the loss of the right to practice law, “and that this would negatively affect his financial situation.”

Judge Brand declined to adopt a bright-line rule that would preclude a convicted felon from ever establishing good faith. On the record, though, she could not conclude that the bankruptcy court committed error in finding a lack of good faith.

The attempt to discharge the student loans “seems premature,” Judge Brand said, because the debtor’s prospects may improve in the next 20 years.

Observation: Were the rule otherwise, convicted felons could more easily discharge student loans than debtors with clean records. Still, the nondischargeability of student loans to some degree seems like additional punishment beyond the sentence imposed for the crime itself.

 
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