I’ve been going on-and-on about a July 7th, 2015 statement put out by the U.S. Department of Education that talked about how the government has made allowances to approve the discharge of federal student loan debt through bankruptcy, in some situations; namely, under the “Undue Hardship” clause of the Federal Bankruptcy Code, under the exception rule commonly known as 11 U.S.C. §523(a)(8).
You can learn more about this by reading “Department of Education Reaches Decision About Student Loans and Bankruptcy.”
In that written guidance the Department of Education said, “over the past thirty or more years the Department and (loan) holders have had to balance their obligation to collect debts with judging whether the repayment of loans would constitute and undue hardship to borrowers in a bankruptcy discharge process.” Yet, up until this point the implementation of that written guidance has been poorly interpreted and or dealt with in courts across the country.
In my experience, I have seen several cases that appear to clearly fall within the Department of Education’s July 7th Policy Directive, and to date there has only been one person who has sought a full discharge be granted basing their Adversary Proceeding complaint on the interpretation of that Policy Directive.
That person is Richard Precht who lives in Alexandria, Virginia. Mr. Precht is a 67-year-old retiree who has been struggling with a number of mental and physical issues. In fact, his depression over his exploding student loan debt and other issues has led him to consider suicide on more than one occasion.
Mr. Precht took it upon himself to go head-to-head against the Department of Education without an attorney. He pursued his case himself. I wonder how many attorneys would have taken on the case considering Precht’s inability to pay for well qualified and professional help. I would bet the number would be near zero. So Precht was left to pursue this on his own or accept his impossible situation. Research shows that attempting to knowledgeably file your own case to discharge your student loans is possible. More on that here, here, and here.
In public records, Mr. Precht says, “The debt has been a growing source of anguish for many years. However, I feel this proceeding is necessary in order for me to relieve a source of pressure and stress from which I feel hopeless to overcome. The debt will never slow down, and it continues to grow exponentially, there is no hope of ever seeing it paid off.”
“Maintain a Minimal Standard of Living” – Not Likely
Richard Precht’s life up to this point has been filled with struggle and strife. Currently he lives near poverty level on a meager $1,200.00 a month. And while he was a federal employee for a number of years and received a higher education, he was later found to be disabled due to his mental and physical problems.
For seven years he received SSDI (Social Security Disability Income), then when he reached retirement age, Social Security switched him over to a straight Social Security annuity. When that took place, his loans were once again due in full, and both his Federal Annuity Check and his Social Security check were being garnished to pay a part of the ever growing interest on his consolidated and defaulted student loan.
No Lack of “Additional Circumstances”
Before considering bankruptcy, Precht tried twice to have his loan forgiven under the Department of Educations’ Total and Permanent Disability (TPD) Discharge, due to total and permanent disability, but both times his applications were rejected.
While I usually publish the source documents for stories, in this particular case I am not going to since his self-prepared 56-page Adversary Complaint reveals the most amount of personal detail that I have ever seen. However, Mr. Prechet did tell me I could share how to find his case using Pacer, a website that publishes court filings nationwide. The case was filed in the United States Bankruptcy Court, Eastern District of Virginia, Alexandria Division. The case number is 15-01167, and was filed November 27, 2015. The case is: Precht v. U.S. Department of Education, et al.
No Lack of “Good Faith”
Not only had Richard Precht made “good faith” payments and attempted to repay what he could afford on his limited income, but his retirement and social security benefits were being garnished which further reduced his limited income. He has been fortunate to be able to live with one of his daughters and her husband, otherwise there is a reasonable likelihood he would be either homeless or in some sort of subsidized housing.
In the past Precht had been able to make successful payments for his education. He had earned a two-year degree at a community college after high school and that degree was paid for in full. When he was 40 years old he returned to college to get a Bachelor’s degree. He earned a 3.8 GPA and graduated with honors, only to be unable to get a job in his degree field. Sound familiar? Educators convinced him to pursue a Master’s degree, which he did within two years earning a respectable 3.6 GPA but again, he was unable to find employment in the Health Administration field.
For his Bachelor’s and Master’s degrees Precht borrowed approximately $55,000.00. The current amount he was said to owe was about $130,000.00 on that original loan balance of about $55,000.
Over the course of time, Mr. Precht was able to repay about $18,000 towards his original loan balance, yet the loan continued to grow exponentially due to interest rates as high as 10-12 percent and additional penalties. Nearly $27,000 of the total amount owing was collection costs and so-called penalties that had been added to the total loan balance.
In order to get out from under his huge student loan, Mr. Precht filed a Chapter 7 consumer bankruptcy and was successful discharging his other unsecured debt of about $3,100. He then immediately filed his own bankruptcy Adversary Proceeding without any assistance of legal aid or an attorney.
His 56-page complaint is substantially documented and contained a level of sophistication that I’m not sure the average person could muster. Precht should have been an attorney instead of a health professional.
Precht provided evidence supporting his complaint that filled (2) three-inch 3-ring binders, over a 1,000 each 8-1/2 by 11 pages of exhibits; and the court required 3-full sets, a grand total of over 3,000 printed pages supporting his case.
“Totality of Circumstances” – Undisputed
However what Richard Precht did most effectively is he told his story to help people understand his situation in full. He clearly explained how he got to this point and he was able to more than adequately explain the futility of his situation.
Precht quoted both the Totality of Circumstances Test and the Brunner Test in his complaint and he prevailed under the three-part Brunner Test mandated in the Fourth Circuit where his case was filed. These are the tests to date that bankruptcy courts have inconsistently used to determine if private and federal student loans are eligible for discharge.
In a brilliant move and with great persuasion Richard Precht even used that July 7th Department of Education’s written guidance about allowing the discharge of some federal student loans. Perhaps Precht is the very first to have won a full discharge using the Department’s own Policy Directive? Could this be the beginning of something big?
Richard emailed me and provided me with this timeline of his efforts to eliminate his federal student loans through bankruptcy. Here is what he shared with me:
- I filed a chapter 7 personal bankruptcy on October 13, 2015
- On November 27th, 2015, following the Trustee’s Meeting, I filed an Adversary Proceeding under 11 U.S.C. §523(a)(8) to prove “Undue Hardship” in a court that has adopted the 3-part “Brunner Test”.
- In my complaint I had four cause of actions listed. The last clause specifically detailed the July 7, 2015 Dept. of Education’s Policy Directive, and called for the court to dismiss my loans based on the D.O.E. letter which (paraphrasing here) directed lenders to settle cases of undue hardship without a trial if possible and to avoid litigation costs and protracted trials, etc, etc. (You know the letter and have posted it on your site).
- On December 30th, 2015, the U.S. Attorney filed a “MOTION TO STRIKE THE COMPLAINT” stating it was too long and also asking for an extension of time.
- On January 8th, 2016, I filed a “MOTION TO OPPOSE” (the D.O.E.’s motion to strike my complaint)
- On January 20th, 2016, the Bankruptcy Court ordered a Discharge of my Chapter 7 Personal Indebtedness. (Note: My personal debts were discharged – the student loan remained to be dealt with)
- On February 2nd, I attended a hearing on the MOTIONS.
- At that hearing the Judge ruled in my favor and (paraphrasing here) told the U.S. Attorney that there have been longer cases filed, that Mr. Precht is warranted in presenting his case in the complaint, and that the D.O.E. should go ahead and answer the complaint to the best of their ability.
- The mail on February 3rd included a signed Motion by the Judge, to rule in my favor (Motion GRANTED in part / and DENIED in Part), stating that the D.O.E. must answer the complaint by February 5th, 2016.
- On February 5th at 4:00 pm, the U.S. Attorney called me and stated the D.O.E. is going to discharge all of my D.O.E. student loan debts (I do not have other lenders to deal with-it is all D.O.E. loans which were consolidated and defaulted and garnishing my Social Security and my small Federal Retirement annuities).
- Later that same day, when I opened my email I had (2) emails from the U.S. Attorney. One included the Certificate of Indebtedness; and the second is the draft of the Final Order to dismiss the loans ready for signatures.
- On February 18th I received the signed CONSENT ORDER entered 02/18/16 at 15:08:56 as DOC 31 for case 15-01167-RGM in the Eastern District of Virginia, Alexandria Division, Judge Robert G. Mayer, United States Bankruptcy Judge.
Precht said, “THIS is a huge WIN! I used the Department of Educations July 7th Policy Directive to argue my case and it worked! I did not even have to go to any Pre-Trial or Discovery meeting or wait on a docket for a trial date – and there is NOT GOING TO BE ANY TRIAL!” It is over, and I received a full discharge of my student loan.”
Up until this date I’ve seen cases where the Department of Education had been fighting back in granting a discharge when it was clearly against their written policy. My hope is the Precht cracked the egg and the Department of Education will now more consistently apply their own written policy. Can you imagine that?
But I think the previous objections to the bankruptcy discharge which meets the Department of Education approval for discharge, described here, has been more of a process and implementation issue than an attempt for the Department of Education to act opposite to their own instructions. Things in government rarely change with the flip of a switch.
This is Not a Slacker Victory
Precht’s victory is not to be applauded because you might think he beat the system to walk away not paying to go on vacation or buy a second home. It is to be recognized as a victory in allowing someone in a impossible situation to receive their legally entitled fresh start under the law using commonsense guidance.
Hopeless people in hopeless situations deserve hope, especially when they are buried under years of student loans.
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.