Law Schools

Medical School Graduate Who Worked Odd Jobs For Years Gets $440,000 Of Student Loans Discharged In Bankruptcy

These happy endings are unusual but not all that rare.

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Last December, the bankruptcy court in San Diego discharged almost all of a medical school graduate’s federal student loans. The court found that forcing him to repay the loans would create an undue hardship for him.

The debtor, Seth Koeut, filed bankruptcy in 2018 to discharge his $440,000 student loan balance. He went to medical school in Puerto Rico and was unable to secure a residency position despite applying to various programs for five years.

After graduating medical school in 2010, with periods of unemployment, Koeut worked as a sales associate at Bloomingdale’s, Crate & Barrel, and Banana Republic. He was a call center agent, a parking lot signaler, a canvassing director for political campaigns, a restaurant host, and a restaurant dishwasher.

He applied to 5,000 jobs but was unsuccessful. He even hired a recruiter who told him that his medical degree was a deterrent which made him overqualified for most positions in the medical field.

The court found that his prospects for a high-paying job has decreased due to his unemployment and his lack of experience in certain industries. An expert’s report has determined that Koeut’s maximum possible salary is about $55,000 which he will achieve in 10 years.

The court applied the three-part Brunner test to determine whether being forced to repay the student loans would create undue hardship. First, Koeut had to show that he cannot maintain a minimal standard of living for himself if forced to repay the loans. Second, additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Finally, he has made good faith efforts to repay the loans. This determination is fact intensive.

The first part of the test was met. All parties agreed that Koeut can meet a minimal standard of living with his current pay. The Department of Education claimed that he should have increased his current income. But the court stated that future income and expenses are not considered.

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As for the second part of the test, the court must consider a number of factors to determine whether the debtor has the ability to make student loan payments in the future. Some factors didn’t work in Koeut’s favor. He has an extensive education and has no disabilities or children.

However, other factors strongly supported a partial discharge. Koeut has no additional assets he can liquidate to pay the loans. He was underemployed but it was through no fault of his own. He has taken any job available, including being a dishwasher. He applied to 5,000 jobs and were rejected. And as noted earlier, his maximum potential income is $55,000 per year.

After weighing these factors, the court found that the second part of the test was met because Koeut’s conditions will persist and will never earn sufficient income to pay his student loans.

Finally, the court considered whether Koeut made a good faith effort to repay his loans. The Department of Education argued that he did not act in good faith because he filed bankruptcy instead of staying on the income-based repayment program. But the court noted that he had good reasons to reject IBR as it would negatively affect his credit for many years and he faces a large tax bill when the loans are forgiven. His low credit score would limit what jobs he would qualify for, particularly jobs involving access to certain personal, confidential, or proprietary information.

Since the court found that Koeut has met all three parts of the Brunner test, being forced to repay his student loans would create an undue hardship to him. The court discharged $423,174 of his outstanding student loans. The remaining $8,291.67 will be repaid through a payment plan of $41.87 per month from December 2031 until December 2048 with an interest rate of 0.11%.

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While this case involved a medical doctor who was unable to secure a residency, his story is relatable to Above The Law readers. There are law school graduates who were unable to get a job after graduation, even in a good economy. Many had to work menial jobs to pay the bills and avoid a resume gap. Their law degree made them overqualified for certain jobs while unqualified for others. Some tried to alleviate this problem by starting their own practices with varying levels of success. But despite all of the networking and hard work, there will be some who will still live on the margins with their debt increasing and no light at the end of the tunnel.

These happy endings are unusual but not all that rare. Generally, student loans have been fully or partially discharged where the loans were on repayment for many years, the debtor has continually lived a modest lifestyle, has made attempts to improve his income and has made good-faith attempts to repay the loan. As these cases are heavily fact intensive, it would be in the debtor’s interest to document all attempts to improve their station in life.

According to Yahoo Finance, the Department of Education has not appealed the ruling and their new leadership team is reviewing existing litigation and identifying areas where they may take a different posture. The Senate has recently confirmed Miguel Cardona as the Secretary of Education who stated that student loans would be a priority for him.

Seth Koeut will get the fresh start that most in his situation can only dream about. However, it did not come quickly nor easily for him. He tried to get a residency after graduation and upon failing that, worked odd jobs and was rejected from every job he applied to. Others in his situation could get similar relief. With new leadership in the Department of Education, hopefully they will give debtors more options to resolve their student debt.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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