The Tenth Circuit issued an interesting decision today regarding discharge of certain student loans known as "HEAL" Loans (more fully known as "Health Education and Assistance Loans"). Such loans are available only for education expenses incurred in the pursuit of a degree in the field of health or medicine. The particular debtor had obtained the loans for purposes of completing a chiropractic degree. Ultimately, he never completed the degree. Later in life, he sought to discharge the loans in a Chapter 7 bankrutpcy. School loans are apparently not normally dischargeable in bankruptcy and, specifically, a HEAL loan is not dischargeable unless the bankruptcy court finds (among other things) that the "nondischarge of such debt would be unconscionable." 42 U.S.C. sec. 292f(g). The bankruptcy court had entered an order finding the debt to be dischargeable. The Bankruptcy Appellate Panel affirmed.
The Tenth Circuit Court of Appeals, in an opinion by Judge Ebel, reversed. The Court held that the unconscionability standard "is a heavy one and is placed squarely on the debtor." The proper standard for analyzing this issue is one of the "totality of the circumstances" -- "bankruptcy courts should examine the totality of the facts and circumstances surrounding the debtor and the obligation to determine whether nondischarge of the obligation would be unconscionable."
The Court listed several factors for bankruptcy courts to consider in analyzing the "unconscionability" issue: (1) the debtor's income, earning ability, health, educational background, dependents, age, accumulated wealth, and professional degree, (2) the debtor's claimed expenses and standard of living, (3) whether the debtor's condition is likely to continue or improve, including whether the debtor has attempted to maximize his income by seeking or obtaining stable employment and whether the debtor is capable of supplementing his income through secondary part-time or seasonal employment, (4) whether the debtor's dependents are, or could be, contributing financially to their own support, (5) the amount of debt and the rate at which interest accrues, and (6) the debtor's good faith. The key question is whether nondischarge would be "shockingly unfair, harsh, or unjust, or otherwise unconscionable." Given the stringency of the standard, the Court was content that, in all but the most difficult cases, the question "will be obvious."
The Court analyzed each of the factors with respect to this particular debtor and found that the debt should not be discharged, determining that the bankruptcy court's findings to the contrary were "clearly erroneous." Judge Ebel, for the Court, concluded:
The above factors paint a picture of Mr. Woody as a man who has struggled to earn a decent income for much of his life, but who has in recent years found employment that utilizes his skills and provides him with a reasonable income. He has lived a relatively frugal existence, but has also chosen to devote a portion of his income to certain expenses that were not necessary to maintain his standard of living. While he was aware of the significant debts he had accrued in educational loans, he made very little effort to address these obligations and has effectively allowed them to languish for more than two decades . . . . Mr. Woody now finds himself approaching retirement age, making a decent income for the time being but concerned about his lack of retirement savings and the potential for expensive health problems in the future . . . . Under these circumstances — in particular, Mr. Woody’s present level of income and his lack of effort to make payments toward his educational loans despite the apparent availability of funds from which he could have done so — nondischarge of his HEAL loan debt would not be “excessive” or “exorbitant,” nor would it “[lie] outside the limits of what is reasonable or acceptable,” or be “shockingly unfair, harsh, unjust,” or “outrageous.”
While we do not doubt that Mr. Woody faces financial difficulty in the future based on his age, health, and lack of significant retirement savings, we cannot ignore the fact that he has gained steady, full-time professional employment and yet has failed to confront in good faith the obligation that he assumed when he accepted a HEAL loan, a failure that persisted even as he put away money for his own retirement and undertook voluntary expenses such as furniture storage, union membership, charitable contributions, and excess life insurance . . . We do not think that Congress intended the discharge provision of sec. 292f(g) to allow a debtor to spend decades without making loan payments, even after having worked full time for several years, then to receive a discharge of his HEAL loan obligations because his health begins to fail as he approaches retirement age.
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