Erie-area woman takes rare route over student loans: bankruptcy

Sept. 21--Mary L. Morgan graduated from Mercyhurst College in 1993 with an associate degree in business management and $11,830 in student loan debt.

Twenty-one years later, the debt has doubled as Morgan has struggled to repay it.

The 52-year-old Waterford resident is on food stamps and earns $1,100 a month as a customer service representative at Blair, a mail-order company.

The student loan debt burdens Morgan's finances the most.

She has taken a difficult and rare approach to try to erase it.

Morgan filed for Chapter 7 bankruptcy, and she wants a judge to discharge her student loan debt.

She will get little help from the law. Congress' changes to the U.S. Bankruptcy Code over the years have made student loans, which are unsecured debts, extremely hard to eliminate in bankruptcy.

Morgan will have to show, among other things, that her poor financial condition is likely to persist for the rest of her life -- that, in the parlance of bankruptcy law, her situation has "a certainty of hopelessness."

"The standard is really high," said lawyer John Melaragno, who monitors cases in U.S. Bankruptcy Court in Erie as a trustee. "It is rare that we see these."

Morgan and her lawyer are hoping her case is different, and that she is able to win a discharge by proving repayment of her student loan debt would impose an "undue hardship" -- the sole exception the Bankruptcy Code allows for a discharge of student loan debt to occur.

"We will see what happens," said her lawyer, Gary Skiba, who is handling Morgan's case pro bono. "These are always tough, because the Bankruptcy Code is very tough."

Flood of debt

Morgan's request for relief in Bankruptcy Court coincides with the national debate over whether the student-loan system needs reform.

President Barack Obama over the summer expanded the Pay-As-You-Earn repayment plan for student loans, and several lawmakers have proposed other changes to address rising student loan debt.

In January, U.S. Rep. Frederica Wilson, a Democrat who represents Miami, Fla., introduced legislation that would lift the restrictions for discharging student loans in bankruptcy. Her Student Loan Borrowers' Bill of Rights Act remains in committee.

Outside of mortgages, student loan debt -- $1.12 trillion as of June 30 -- is the largest form of debt in the United States, larger than debt for auto loans and credit card debt, according to the Federal Reserve Bank of New York, which studies student loans.

"Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008," the New York Fed reported in March 2013.

The bank and others have also pointed to a rise in student loan debt among older Americans, who, like the younger Morgan, have yet to pay off loans they got to attend college.

"The percentage of households headed by those aged 65 to 74 having student debt grew from about 1 percent in 2004 to about 4 percent in 2010," the Government Accountability Office reported on Sept. 10.

"While those 65 and older account for a small fraction of the total amount of outstanding federal student debt, the outstanding federal student debt for this age group grew from about $2.8 billion in 2005 to about $18.2 billion in 2013."

Meeting a test

Before the mid-1970s, student loans were dischargeable in bankruptcy cases like any other debt, such as an auto loan or credit card debt. Congress, concerned about the potential for the fraudulent discharge of student loans, restricted their discharge when it introduced the current Bankruptcy Code in 1978.

Congress has since increased the limits on the discharge of student loan debt, with "undue hardship" as the exception.

Congress has never defined what constitutes "undue hardship," leaving the determination to the federal bankruptcy judges. They have adopted what is known as the Brunner test, named after a 1987 case out of New York.

Under the test, "undue hardship" exists if:

- "The debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loans."

- "Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the student loan repayment period."

- "The debtor has made good faith efforts to repay the loans."

Morgan in March filed for Chapter 7 bankruptcy, or liquidation. She listed assets of $8,100 and liabilities of $59,000, including $21,593, or what she now owes on the original student loan of $11,830, according to court records. The interest rate on the loan is 7 percent.

Skiba, Morgan's lawyer, in July filed a separate lawsuit -- known as an adversary proceeding -- in Morgan's bankruptcy case. He asked U.S. Bankruptcy Judge Thomas P. Agresti to discharge her student loan debt under the "undue hardship" standard. Agresti set a hearing for Oct. 2 at the federal courthouse in Erie.

Skiba is arguing Morgan meets all the criteria of the Brunner test. In court records, he cited her income at Blair and her reliance on food stamps of $203 a month to provide for her and her 13-year-old daughter, with whom she lives.

Morgan, Skiba wrote, is uninsured because she cannot afford health insurance, and she incurred $10,000 in unpaid medical expenses when she was hospitalized for an unspecified illness in May. He wrote that Morgan likely would be required to stop her contributions of $69 a month to her 401(k) retirement plan if she got insurance through the Affordable Care Act.

And Skiba wrote Morgan has been in repayment programs for her student loan, including an income-based program that has allowed her to forego payments on the loan until April 2015.

The repayment program would require a monthly payment of about $250, to be paid over 12 years and two months, with those payments totaling $36,497, Skiba wrote. He wrote that Morgan's financial situation is not expected to change so that she could succeed in the repayment program.

Morgan, he wrote, "has tried unsuccessfully to obtain employment that would better correspond with her associate degree or that would better provide compensation. At age 52, the debtor has few prospects of bettering her financial situation."

Morgan, through Skiba, declined to be interviewed for this story.

Loans that 'linger'

The Pennsylvania Higher Education Assistance Agency originally guaranteed Morgan's loan, but the defendant in her case is the Educational Credit Management Corp., of Oakdale, Minn., which is authorized to fight her discharge request.

ECMC wants Morgan's claim dismissed, according to a court filing docket Monday.

It is arguing Morgan's circumstances fail to meet the Brunner test, and that she has yet to exhaust remedies for repayment, such as enrolling in the William D. Ford Federal Direct Loan Program.

On its website, ECMC warns against the difficulties of a debtor meeting the Brunner test. "For many student loan borrowers," according to the website, "the legal hurdles are significant."

Skiba, Morgan's lawyer, does not discount the legal hurdles. But he also does not discount the difficulties that he said face people such as Morgan -- debtors in their 50s and 60s unable to pay off their student loans.

Unless those loans are discharged in bankruptcy, Skiba said, "they linger with them forever."

ED PALATTELLA can be reached at 870-1813 or by e-mail. Follow him on Twitter at twitter.com/ETNpalattella.

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