Updated: Aug 29, 2019
On the heels of this week’s discussion of the strategic potential of bankruptcy, even if a significant portion of debt is educational, comes a decision in the case In re Jeffrey Howell and Rebecca Howell, 11-12685, from the Bankruptcy Court in the Western District of New York. Howell recognizes a peculiar difficulty for holders of student loans that I did not touch upon in my earlier post, namely, the difficulty debtors have in filing petitions under Chapter 7, rather than Chapter 13, when a significant portion of their debt is educational. This is because a debtor with an income higher than the median income for his state, who nevertheless spends an inordinate percentage of his monthly income on the repayment of his student loans, has difficulty qualifying for a Chapter 7 bankruptcy, and is often forced to consider Chapter 13.
Chapter 13 is not without its advantages, which are beyond the scope of this discussion. The disadvantage, for many debtors, is that Chapter 13 does not wipe the slate clean. Debts are not completely discharged, but a percentage of debts are paid off over time, based on the debtor’s monthly disposable income. Because, as previously discussed, student loans are generally not dischargeable in bankruptcy, whether in Chapter 7 or Chapter 13, a debtor who is forced to pursue a Chapter 13 plan will receive a stay of efforts by creditors to collect upon student loans during the Chapter 13 repayment period, but those loans will continue to accrue interest while the debtor is forgoing monthly student loan payments in favor of making payments on other debts under the Chapter 13 plan, often for a number of years. The result, all too often, is that the debtor obtains some measure of relief for some of their debts, but ends up even further in debt on the educational loans, for which the debtor can obtain no meaningful relief through the bankruptcy system.
Offering a small ray of hope is Howell, courtesy of the Western District of New York’s Chief Bankruptcy Judge Carl Bucki. Debtors whose monthly income is above the median, including those debtors who may have relatively high-paying employment offset by high monthly student loan payments, can defeat the presumption that a Chapter 7 bankruptcy filing is abusive by demonstrating that their student loan payments are “special circumstances” siphoning off their monthly disposable income.
Chief Judge Bucki’s ruling does not accord with other rulings across the country, such as those in Pennsylvania, Ohio, Arizona, Kansas and New Hampshire, but follows an emerging trend started by bankruptcy courts in Alabama, Illinois, Indiana, Delaware, Oklahoma and Georgia. The Howell ruling also is not binding upon other bankruptcy courts in New York. However, until a contrary binding authority appears, there is reason to believe that Howell will benefit debtors with significant student loans who would otherwise not be eligible for Chapter 7 relief. It certainly must factor into the strategy of bankruptcy lawyers counseling debtors whose income has not yet caught up to their educational debt.