The United States Bankruptcy Court for the Northern District of California issued an interesting ruling that discharged over a quarter millions dollars of federal student loan debt for a 56-year-old securities law attorney (In re Barrett, Case No 14-43516).
Kevin Barrett is a single man who has been a licensed attorney since 1987. He is in good health and has no dependents. At one point he earned as much as $165,000 per year as a securities lawyer, but that income ended in 2007. He earned very little for the next 4 years. In 2011 he was hired for $98,000 per year by another firm until August of 2013 when he was terminated. Since that time he has struggled to earn more than $10,000 per year in his own practice.
The debtor did not live extravagantly. He paid $750 per month for rent and drove an older car. He had no savings or retirement account.
The debtor had paid nearly $40,000 in student loan payments over the years.
The Department of Education objected to the discharge since Barrett never applied for one of their Income Based Repayment (“IBR”) plans. Under such plans a debtor’s payment is pegged to their actual current income level, and in Barrett’s present condition the payment would have been zero. However, the bankruptcy court rejected this argument.
While the DOE correctly argues that this court must consider [the debtor’s] failure to apply for one of its income-based repayment plans, such inaction is insufficient, standing alone, for this court to find against him.
Given the debtor’s age and present lack of income to make a meaningful payment of any amount and the significant income tax consequence of forgiving such a large debt, the California bankruptcy court considered the income-based payment plan to be impractical.
When seeking to discharge student loans in bankruptcy it is helpful and appropriate to have a record of applying for the various Income-Based Repayment plans available. Such applications demonstrate the good faith courts generally demand as a prerequisite to entertaining a hardship discharge. However, when it comes to older debtors who have in good faith attempted to improve their circumstances while paying what they can on school debts over an extended period of time, the failure to apply for an IBR is not always conclusive.
Image courtesy of Flickr and Harvard Law Record.