Del. Bankruptcy Ruling Sparks Rethink On Student Loan Debt

Law360 (January 26, 2022, 7:50 PM EST) -- A recent ruling from a Delaware bankruptcy judge that eliminated a debtor's near $100,000 student loan debt has energized consumer bankruptcy attorneys who say it pulls a harshly interpreted standard for "undue hardship" back to its origins and could pave the way for wider student debt relief.

The 29-page opinion, which appears to be the first to address a student loan debtor's use of medical cannabis and is one of the few to address an expired payment period, was carefully crafted and has a good chance of withstanding appeal, several attorneys told Law360.

Joining a growing wave of courts taking a fresh look at the Brunner test, U.S. Bankruptcy Judge Laurie Selber Silverstein of the District of Delaware rejected "onerous" and "overly strict" standards that have evolved for discharging student debt as "unmoored from the original test and the plain language of 'undue burden.'"

"She did nothing more than coherently, logically interpret this test the way it is plainly written," said Vivian A. Houghton, a consumer bankruptcy attorney with Doroshow Pasquale Krawitz & Bhaya in Wilmington, Delaware. "What she finally did was interpret it the correct way."

Judge Silverstein found Ryan K. Wolfson proved his student loans caused him undue hardship under Section 523(a)(8) of the Bankruptcy Code, and discharged the debt even though he never made a voluntary payment, didn't go on a payment plan, and was three decades away from retirement.

"I felt like almost a miracle happened," Wolfson, now 35, told Law360.

Educational Credit Management Corp., which owns roughly half of Wolfson's $95,137.02 discharged debt, appealed the decision Tuesday.

The U.S. Department of Education, which owns the rest of the loans, declined to say whether it would appeal.

Judge Silverstein joins a "little groundswell of judges" who are reexamining Brunner and making more "realistic" findings about undue hardship, said Susan L. DeJarnatt, a professor at Temple University's Beasley School of Law.

Like earlier decisions in Price and Rosenberg , Wolfson finds that a lifelong student loan obligation conflicts with the "fresh start" that bankruptcy promises, DeJarnatt said.

Price v. U.S. Dept of Education is a 2017 decision from the U.S. Bankruptcy Court for the Eastern District of Pennsylvania that discharged a single mother's $26,000 student loan debt, and Rosenberg v. New York State Higher Education Services Corp. is a 2020 decision from the U.S. Bankruptcy Court for the Southern District of New York, since overturned, that relieved a Navy veteran's $221,000 law degree burden.

Student debt can be eliminated in bankruptcy, but only in cases of "undue hardship" — a term that Section 523(a)(8) doesn't define.

Most courts determine undue hardship by applying a three-prong test from Brunner v. New York State Higher Education Services Corp. , a 1987 Second Circuit decision that rejected a debtor's request to discharge $9,000 in student loans less than a year after she got a master's degree.

Under Brunner, a debtor must show that repaying the loan would prevent a "minimal standard" of living, that "additional circumstances" make financial difficulties "likely to persist" during the repayment period of the loan, and that "good faith efforts" had been made to repay.

When Brunner was decided, student loans were issued for 10 years and debtors could discharge them after five, said John Rao, an attorney with the nonprofit advocacy group the National Consumer Bankruptcy Rights Center. "Debtors were trying to get things discharged without waiting five years," he said.

Legislative changes since then have made student loans more difficult to eliminate. Congress extended the waiting period to seven years in 1990 and eliminated it entirely in 1998. The code was further tightened in 2005 to include private student loan debt.

Over time, different circuits also added new layers of interpretation to Brunner that made undue hardship more difficult to prove, with courts demanding debtors show a "certainty of hopelessness," or "intolerable difficulties," or a "total incapacity to repay" in the future.

"Undue hardship doesn't mean that," Rao said. "That was just made up by judges."

Filing adversarial lawsuits is expensive for debtors and success is uncertain, said Wolfson's attorney, Timothy J. Weiler of Timothy J. Weiler Law. Some lenders quickly settle but others litigate fiercely, and proving hardship can be tough.

"I'd ask, did you get hit by lightning? Have you been living on hot dogs and beans for the last three years?" Weiler said.

Wolfson has epilepsy, which he manages with medical cannabis using a Delaware-issued cannabis card. He cannot start work before 9:30 a.m. due to risk of seizures, and he cannot apply for jobs that require drug testing due to his cannabis use, the opinion said.

Wolfson used his loans to get a bachelor's degree in business science from Penn State University in 2010. He managed a hip-hop artist and co-owned a TV show after graduating, but his ventures failed, and he continues to rely on his father for financial support, the opinion said.

The ruling appears to be the first student loan bankruptcy decision to discuss medical cannabis, and the fact that the court accepted Wolfson's $400-per-month spending on cannabis as an allowable medical expense is noteworthy, said John Patrick Hunt, a law professor at the University of California, Davis School of Law.

Wolfson meets the first Brunner prong because despite a "long-running, expansive, and largely futile job search since graduation," he still cannot support himself without "family charity" that could end at any time, Judge Silverstein wrote.

She concluded that Wolfson automatically met Brunner's second prong because the 10-year payment period on his loan had run out. "The second prong directs courts to look at the current repayment period, not a hypothetical one," Judge Silverstein wrote.

This part of the opinion is noteworthy because there is little case law on payment periods that have run their course, Hunt said. Apart from 2019's Nitcher v. Educational Credit Management et al. decision out of Oregon bankruptcy court, "Wolfson seems to be the only good law on this point at the moment," Hunt said.

Judge Silverstein added that even if the payment period hadn't expired, Wolfson met Brunner's second prong because his 10-year history of "unprofitable gig work and low- to minimum-wage jobs bearing little hope of advancement" made his financial difficulties likely to persist.

It is important that Judge Silverstein did not rely on Wolfson's epilepsy to prove "additional circumstances" and a "certainty of hopelessness" under Brunner's second prong, according to Houghton of Doroshow Pasquale.

"Wolfson is not required to prove that his epilepsy, specifically, is hampering his job prospects," Judge Silverstein wrote. "He need only prove that his future income will not allow him to both maintain a minimal standard of living and repay the loans."

That part of the decision struck Houghton, who has struggled in the past to help clients prove a debilitating illness in the face of lenders who accused them of faking symptoms to avoid work.

"I was looking to prove something that Brunner didn't demand that I prove," Houghton said. "It's got me thinking differently about bringing suit."

Judge Silverstein rejected lenders' arguments that Wolfson should have gone on a payment plan, saying it would have only prolonged indebtedness while sabotaging any chances of improving his credit.

"His failure to engage in this futile exercise does not amount to bad faith," she wrote.

She also rejected arguments that a one-time $6,000 insurance payout Wolfson got from a car accident should have been used to pay down his student loan debt, finding such a payment would have been "ultimately performative" and "futile."

"It is enough to show, as Wolfson has, that the debtor has made a good faith effort to maximize income and minimize expenses, and that the failure to make payments stems from inability, not unwillingness," she wrote.

Hunt told Law360 that it was the first time he had ever seen the term "performative" used in this context. "It sums up the situation nicely," he said.

The opinion was written carefully and has a good chance of standing up to an appeal, attorneys told Law360.

Jarret P. Hitchings, a commercial finance and corporate restructuring attorney at Duane Morris LLP who has appeared before Judge Silverstein in court, said the decision reflects Judge Silverstein's "solution-focused" approach and her strict application of bankruptcy law.

"She is very focused on the facts in the record, and this opinion reflects that," Hitchings said. "The opinion takes time to walk through the debtors' circumstances and makes a point to avoid speculation or reliance on hypotheticals."

Judge Silverstein clearly "had an eye on appeal" when she wrote the opinion, said Ed Boltz, a bankruptcy attorney with The Law Offices of John T. Orcutt PC in Durham, North Carolina, who is also legislative co-chair of the National Association of Consumer Bankruptcy Attorneys. The judge analyzed each point in multiple ways and buttressed the opinion with "good, solid arguments" that other attorneys can use, he said.

"On count after count, she argued that Brunner should be used in a less brutal fashion than a lot of courts had in the past," he said. "If this stands, it does help. If you can get a 34-year-old discharged, you can get a 60-year-old discharged also."

Frances Gauthier, litigation director at Legal Services Corp. of Delaware, a nonprofit law firm and community education organization that assists low-income families in the First State, said her organization hopes to use the opinion to seek relief for other debtors.

"Everybody was really excited about this opinion," Gauthier said. "It's something we hope to build on."

Ryan K. Wolfson is represented by Timothy J. Weiler of Timothy J. Weiler Law.

The Department of Education is represented by the U.S. Department of Justice.

Education Credit Management Corp. is represented by Tiffany A. Poole of Poole Mensinger Cutrona & Ellsworth-Aults.

The original bankruptcy case is In re: Ryan K. Wolfson, case number 1:19-bk-11618; the adversary case is Ryan K. Wolfson v. Betsy DeVos, case number 1:19-ap-50717, in the U.S. Bankruptcy Court for the District of Delaware.

The appellate case is Educational Credit Management Corp. v. Ryan K. Wolfson (In re: Ryan K. Wolfson), case number 1:22-cv-00095, in the U.S. District Court for the District of Delaware.

--Editing by Orlando Lorenzo.

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