KELSEY PAINE–“So you used the department store as an ATM machine?” the bankruptcy trustee asked looking up from his papers at the debtor sitting across the table for the first time.
She looked confused, “No, I just returned things that I had bought using the store credit card and they gave me cash for it.”
“More than $40,000 worth of things that you bought to return for the cash and then never paid the store credit card,” he was looking down at his papers again. “Any creditors here for this case?”
No one, including the department store, answered.
The preceding scenario, although hypothetical, is typical of what may occur in a chapter seven creditor meeting. Debtors usually file bankruptcy for the benefit of a discharge, or forgiveness, of their debt, but only some debts are dischargeable under bankruptcy law. Credit card debt is dischargeable except in cases of fraud, in cases where the consumer has incurred debts of more than $600 of luxury goods within 90 days of filing bankruptcy, or in cases where the consumer has obtained cash advances aggregating more than $875 within 70 days before filing if made in an open end credit transaction.
In the hypothetical opening scenario, the department store may have been able to prevent discharge, meaning that particular credit card debt would have survived bankruptcy, if it had sent a representative to the creditor meeting or if it had objected to the discharge within 60 days of the date first set of the creditor’s meeting. However, because the amount owed is not a large sum to a bigger corporation, this debtor would likely leave bankruptcy free of the debt owed to the store.
The relative ease of discharging a credit card debt in bankruptcy is contrasted sharply with the tough standard for discharging student loan debt, which is discharged only for “undue hardship.” This strict standard for discharging student loan debt ensures that most student loan debt sticks with the debtor through bankruptcy, affecting both young people and retirees.
According to a recent New York Times article, many retirees are still struggling with student loan debt, which is often larger than the original principal amount borrowed due to accumulating interest. For example, the article describes how one 72-year-old retiree borrowed $3,000 in the early 1970’s to get her degree, but now owes $15,000 on this loan. To pay off this debt, Social Security payments, in many cases the retiree’s only source of income, can be reduced to just $750 per month, the congressional limit set in 1998.
Even in this circumstance, the courts may not find the debtor to be suffering from “undue hardship,” and this debt could survive bankruptcy. Court’s interpretations of “undue hardship” often vary drastically as well. Debtors cannot predict which side of the line they will fall on, and may not be able to financially afford to risk taking the issue to court.
The Brunner Test sets out three prongs to determine if a debtor has suffered “undue hardship” that would entitle them to discharge their student loan debt; however, courts have varied greatly in their interpretation of these standards. According to the test, a debtor has experienced “undue hardship” if the debtor has tried in good faith to repay the loans but cannot maintain “minimal” standard of living, which is likely to continue throughout the life of the loan. For example, in evaluating the financial condition of the debtor, some courts hold that it is sufficient if the debtor’s income, which is not expected to increase, cannot reasonably cover the expenses, while other courts hold that this inability to pay is insufficient without a further showing of hardship, such as a illness.
There is a similar issue with interpreting what constitutes reliance on the creditor’s part for making fraudulent credit card debts nondischargeable. For example, in American Express Travel Related Serv. Co. v. Hashemi (In re Hashemi), the debtor’s credit card debt was not discharged because the debtor took an expensive trip to Europe right before bankruptcy, knowing that he couldn’t afford to repay the creditor. However, another court, In re Ellingsworth, came out with the opposite result, holding a debtor’s credit card debts were dischargeable even though the debtor knew she would not be able to repay them, because the bank did not check the debtor’s financial history before issuing the card and therefore could not have relied on any representations.
Because of the strict standards of these laws and the varying ways courts interpret them, some holdings run contrary to fundamental bankruptcy principles. Given the current economy, debtors who are not discharged of at least part of their student loan debt may be denied their fresh start. Conversely, a debtor who is careful about the timing of when he or she acquires the debt may be able to easily abuse the system. An altered standard on both could be fairer and possibly benefit the economy and society.
