Regular readers of this blog know that you cannot discharge student loan obligations through bankruptcy absent a showing of undue hardship. If you go broke borrowing money for expensive cars, houses, and monkeys/butlers, no problem, file for bankruptcy and start over. But if you go broke trying to better yourself through education, the government will make you beg and prove that you are sad and hopeless. Wonderful system we’ve got here.
We’ve also talked about how many people who might be eligible for undue hardship on their student debts don’t even try. The system is daunting and complicated, and I’ve argued that prostrating yourself in front of a bankruptcy court and letting them invade your life to the point of telling you how much you should be spending on your cell phone is not something that comes naturally to people with pride and dignity. This might be hard to understand for people who have never been in this situation, but I’d much rather be a “deadbeat” and have my wages garnished with the discretion on how I spend the rest than have some old judge tell me how much money I should be spending on breakfast.
When trying to get your debts discharged through bankruptcy, there seems to be no limit to what a judge can take into account to see if you are really desperate. But a recent Ninth Circuit opinion upholding a discharge by reversing the district court put one boundary on what a court can look at to determine if you’ve tried to pay your debts in “good faith.”
The court can’t look at your household and suggest that you pimp out your wife. So at least that’s something…
The case arises out of the sad story of Michael Hedlund. Hedlund graduated from the University of Oregon and then Willamette Law School in 1997. He then failed the bar twice, missed a third opportunity to sit for the bar when he locked his keys in his car, and ended up as a juvenile counselor. He owed $85,000 in 1999 (can you imagine what that would be for a 2013 grad?), and defaulted on his loans. Bad things continued to happen, and eventually he filed for bankruptcy.
The question for the Ninth Circuit was whether or not Hedlund acted in “good faith” to “maximize his income and minimize his expense.” The bankruptcy court said that he did… even acknowledging that at this point, passing the bar and getting his law license would not materially improve his financial situation (Willamette Law must be so proud).
The district court reversed. Chief Judge Ann Aiken found Hedlund’s expenses “immoderate” and his attempts to negotiate a suitable repayment plan “even more vexatious.” Apparently Hedlund, who has a wife and kids, has two cell phones and a second car lease. This struck the district court as a problem.
Regardless of whether you think a family should have two whole cell phones, instead of just one, I want to point out that this is the kind of invasive discussion you can expect if you try to discharge your student debts.
In terms of the repayment plans, Hedlund didn’t take some pre-trial offers made by his creditors. I’ve been in the situation where a creditor makes an “offer” that they think I should be able to pay but I can’t. I make a counter-offer that represents that maximum I can pay and still make my rent, the creditor thinks that I’m assuming a negotiating posture, and they get pissy. It’s a ridiculous game. The bankruptcy court didn’t think that Hedlund showed bad faith in rejecting the offers; the district court did.
But to me, the most “vexatious” finding from the district court is this one:
Finally, the court observed that Hedlund and his wife had chosen to live as a single-income family, “a life-style that few today can afford.”
Who in the f**k does this court think it is? The Hedlunds have kids. The court has no right to dictate how they are cared for. For all we know, the wife’s earning potential wouldn’t cover child care costs. And even if it would, a court cannot essentially order a man to pimp out his wife to pay his debts. It’s one thing for a court to look at finances, but this crosses a line into judging the Hedlunds’ marital relationship. It’s disgusting. What’s the next step? “While Mrs. Hedlund doesn’t have a lot of skills, she is pretty and athletic enough to at least be a stripper, a fact that seems to not have occurred to Mr. Hedlund before filing for bankruptcy.”
In reversing the district court, Judge A. Wallace Tashima of the Ninth Circuit addressed this directly:
There was considerable evidence showing that Hedlund had maximized his income, and the [bankruptcy] court properly declined to attribute Mrs. Hedlund’s underemployment to Hedlund’s bad faith.
Thank God. It’s hard enough to show undue hardship without the court judging what your wife does for a living.
Just remember kids, if you are going to borrow money for something, borrow it for 3D televisions and expensive vacations. Borrowing money for your own education means you have to go through this kind of proceeding to even have a chance at starting over.
Hedlund v. Educational Resources Institute Inc. [U.S. Court of Appeals for the Ninth Circuit]
Earlier: Can You Show ‘Undue Hardship’ On Your Student Loans? You May Be Surprised.
Not Even Bankruptcy Will Make Your Student Loans Go Away
Could Law School Loans Become More Easily Dischargeable in Bankruptcy?