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Debtor's testimony hampers student loan discharge.

Byline: Barry Bridges

A ruling of the 1st Circuit Bankruptcy Appellate Panel indicates the need to ensure that debtors are well versed on their household expenses and the information reported in their filed schedules, practitioners say.

In partly affirming a ruling of the U.S. Bankruptcy Court, Judge Frank J. Bailey wrote for the panel that a debtor's student loan obligations were excepted from discharge since she did not demonstrate that the monthly payments of $132.90 created an undue hardship.

Debtor Inga Olsen's failure to explain the details of her reported $600 in monthly transportation costs figured prominently in the decision, as she could account for only $200 of the itemized $7,200 annual expense.

The reliability of the debtor's schedules as a whole was therefore questioned, and the BAP determined through the applicable totality of the circumstances test that Olsen had not satisfied her burden of showing an inability to maintain a minimal standard of living if she repaid her student loans.

However, the BAP reversed the lower court's holding that the creditor, the Finance Authority of Maine, did not willfully violate the automatic stay when it took 14 months to refund a garnishment of the debtor's Social Security income that occurred just before FAME received notice of the filing.

"We hold that a creditor's failure, upon learning of the debtor's bankruptcy filing, to act with reasonable dispatch to remedy a violation of the automatic stay that at its inception was unknowing ... satisfies the willfulness requirement," the judge concluded.

The 36-page decision is Olsen v. Finance Authority of Maine (In re: Olsen), Lawyers Weekly No. 03-008-17. The full text of the ruling can be found here.

Making the case for discharge

J. Scott Logan of Portland, Maine, represented Olsen and said there are lessons to be learned from the opinion.

"It's extremely important to make sure your client is well versed in what she has to say about household expenses," Logan said. "Here, the debtor's inability to testify credibly on the $600 in transportation costs killed any chance of a discharge."

Logan said he should have better prepared his client to recite her expenses verbatim, especially considering her memory problems.

"And it's important to show you made every effort," he added. "The failure to explore other solutions, such as income-based repayment plans, before filing these kinds of lawsuits is really harmful."

Debtor-side Pawtucket attorney John S. Simonian agreed that more could have been done to make the case for discharge.

"Her income is so meager. She is the classic case of someone who is not going to be able to pay her loans," he said. "I tell my clients if you can walk through my door, you're not going to qualify for student loan discharge. But in this case, the debtor has no chance of going back to work."

Simonian said the judge seemed to be "hung up" on the $600 in transportation expenses.

"That was the whole case here," he said. "She couldn't explain it, she wasn't specific, and the trial judge said it just wasn't credible. In the end, both the trial and appellate judges felt she had sufficient disposable income to pay the loans."

The schedules could have listed other reasonable expenses such as haircuts or children's clothing, he added.

Providence creditor-side attorney Joseph M. DiOrio said that the BAP's use of the totality of the circumstances approach in considering student loan discharges means there will be a broad inquiry into the debtor's schedules.

"That leaves wide open the ability of both parties to argue the facts," DiOrio said, "and it underscores the need for preparation by the debtor. If you're only off balance by a few hundred dollars, something like $600 in transportation costs is going to be magnified under the totality of circumstances test."

As for how to demonstrate undue hardship, Logan said a debtor has to show an active and ongoing default on the student loan.

"In this case, the creditor showed they had been garnishing prior to the petition, and the debtor wasn't able to show that she relied on credit cards or borrowing to make up the difference," he said. "At the end of the day, they had been taking the money and she wasn't actively incurring new obligations because of it."

But student loan debtors are not without legal options in bankruptcy, according to Providence attorney Robert B. Jacquard.

"I often use Chapter 13 to stop garnishment and provide my clients with a payment plan which is affordable for them. It does not eliminate the debt, but can provide significant relief," he said.

Regarding the BAP's holding on the stay violation, DiOrio said the ruling clearly imposes a burden on a creditor to promptly refund monies taken in violation of the stay. Otherwise, the retention will be deemed willful and a creditor could be exposed to damages.

"That's not a position anyone wants to be in," DiOrio said.

He added that promptness is determined on a case-by-case basis, but once a creditor has knowledge that it violated the stay, it is up to the creditor to reverse that action.

"With large loan servicers, that may not happen the next day, but they need to show they began to put the process into motion," DiOrio said. "The opinion makes crystal clear that moving expeditiously is the rule."

FAME attorney Daniel R. Felkel did not respond to a request for comments.

(divider] "The debtor's inability to testify credibly on the $600 in transportation costs killed any chance of a discharge."

- J. Scott Logan, counsel for debtor (divider]

Adversary proceeding

When Olsen filed a Chapter 7 petition in U.S. Bankruptcy Court in Maine in October 2014, she was indebted to FAME in the amount of $8,863 for three student loans. Olsen received her Chapter 7 discharge in February 2015.

A few months later, she commenced an adversary proceeding against FAME requesting a discharge of her student loans. She also sought damages under 11 U.S.C. s.362(k), alleging that FAME violated the automatic stay by garnishing her Social Security income after her bankruptcy filing.

At trial in October 2016, the debtor was the sole witness and testified that she was fully disabled, suffering from peripheral neuropathy, fibromyalgia, sleep apnea, chronic fatigue, constant pain and memory problems.

She further stated that she was unemployed, had not earned an income since 2008, and expected no such income in the future. The Social Security Administration determined in 2008 that the debtor was disabled and not able to work.

Olsen reported a total monthly income of $3,060.14, including $886 in Social Security Disability Income.

Her monthly expenses totaled $3,047, including $600 for transportation, exclusive of car payments and insurance. She testified that amount was for gas and registration expenses associated with her live-in boyfriend's vehicle and his commute and included $200 in annual maintenance costs. She produced no documentation to support the $600 figure.

Evidence showed that one garnishment occurred five days after the debtor's bankruptcy filing and two days after notice of the case was mailed to FAME in November 2014. The debtor testified that a refund was made in January 2016.

In denying the discharge, the Bankruptcy Court judge held that the debtor had not established undue hardship under 11 U.S.C. s.523(a)(8). Further, considering the proximity of the post-petition garnishment to the date that notice was issued, the judge found that FAME had not violated the automatic stay, either by the garnishment itself or by the retention of the funds for 14 months.

(divider] "I often use Chapter 13 to stop garnishment and provide my clients with a payment plan which is affordable for them. It does not eliminate the debt but can provide significant relief."

- Robert B. Jacquard, Providence (divider]

Totality of circumstances test

The BAP affirmed the holding on dischargeability.

"Under the totality of the circumstances test ... we must 'examine the debtor's past, present, and future financial resources and necessary living expenses and whether, taken together with other factors, the debtor has the ability to repay the loans at issue while maintaining a minimal standard of living,'" Baily wrote.

Under that standard, Olsen's case did not pass muster.

Like the trial court, the BAP examined the reported $600 in transportation expenses.

Bailey said that item "was of sufficient size in relation to the balance of her budget that, by itself, it could make the difference between her having the ability to pay her student loans while maintaining a minimal standard of living, and her not having that ability."

Further, the panel found that the questions on the transportation expenses cast doubt on the reliability of the schedules as a whole.

"The record amply supported a conclusion that, at a very basic level, the trial court did not have a reliable picture of the debtor's income and expenses in any of their particulars," Bailey said.

However, the debtor had more success with the automatic stay claim, in that the BAP found clear error in the lower court's holding.

"The Bankruptcy Court found that, on one occasion, FAME garnished the debtor's SSDI benefits while the stay was in effect - that is, after the filing of the petition and before entry of discharge - but nonetheless ruled, without explanation, that there had been no violation of the automatic stay. This was error," Bailey wrote.

The next step in the analysis was determining whether the violation was willful.

The record showed that FAME received notice of the bankruptcy filing shortly after the one instance of post-petition garnishment.

"Upon receiving this notice, FAME became obligated to determine whether it had garnished the debtor's benefits post-petition and, if so, to remedy this violation of the stay ... as soon as practicable," Bailey said.

Noting that FAME offered no explanation, reasonable or otherwise, for the 14-month delay, Bailey said FAME did "what a lender in its position should not do: it retained the garnished funds for an extended period. Thus, what began as a technical violation of the automatic stay became a willful one."

With a willful violation thus established, the BAP remanded for a determination of actual damages, including costs and attorneys' fees, to be recovered under s.362(k)(1).


CASE: Olsen v. Finance Authority of Maine (In re: Olsen), Lawyers Weekly No. 03-008-17

COURT: 1st Circuit Bankruptcy Appellate Panel

ISSUE: Was a creditor's failure to promptly return a post-petition garnishment a willful violation of the bankruptcy automatic stay?


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Title Annotation:Olsen v. Finance Authority of Maine
Author:Bridges, Barry
Publication:Rhode Island Lawyers Weekly
Date:Sep 7, 2017
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