Getting your student loans discharged in a bankruptcy is extremely difficult to do. Even tougher to do when you are an attorney and have a MBA making the argument you “do not anticipate working for another 25 years.” Mr. Barrett, the debtor here, seems to be in fine health and otherwise able to work, so how did he get the court to side with him and rule his student loans dischargeable in his bankruptcy? Read about Mr. Barrett here – the entire case is included by link below.
“Barrett is 56 years old and an attorney licensed to practice in the State of California. He is not married, and has no children or other dependents. Barrett filed his Chapter 7 bankruptcy on August 26, 2014, and received his Chapter 7 discharge on December 10, 2014. Barrett, who represented himself herein, filed this adversary proceeding on November 3, 2014 against several defendants, including the DOE. Barrett dismissed defendants Resurgent Capital Services and LVNV Funding by stipulation, and proceeded to trial against only the DOE. Barrett seeks to discharge $264,056.41 in consolidated student loan debt owed to the DOE. These loans helped to finance a) his college education (he received a B.S. in business administration from San Diego State University in 1982), b) his law school education (he received a J.D. from the University of San Diego School of Law in 1987), and c) his business school education (he received an M.B.A. from UCLA in 1995). Barrett has been a practicing attorney since 1988.
Despite these educational achievements, he has had, to say the least, an uneven legal career. After receiving his law degree, Barrett worked for an insurance defense firm in Los Angeles until 1993, when he left voluntarily to attend UCLA’s graduate business school. After receiving his MBA, Barrett returned to the practice of law by doing “temp” legal work in 1995 and 1996. In the Spring of 1996, Barrett was hired by the Miller, Mailliard & Culver firm in Southern California as an associate to do securities registration work. Miller, Mailliard dissolved in 1997, and he then worked for the Evans, Hendrickson firm for a year doing similar securities work. That firm dissolved in 1998 or 1999. Barrett then was hired by Davis, Wright & Tremaine, a large Seattle based firm. Barrett worked in its Sacramento, California office doing securities registration work. Davis Wright terminated him after one year, and Barrett then moved to New York City to find legal work. In New York, Barrett again resorted to “temp” legal work in the securities field.
He never found permanent work, and he moved to Oakland, California in 2001 to reduce his living expenses and be closer to family. For the next several years, Barrett was an independent contractor for a series of New York law firms (again doing securities registration work) until that work ended in 2005. He was unemployed for several months until he started doing independent contractor securities work for a Southern California law firm in 2006. Sometime in 2006, Barrett moved to Colorado in search of more permanent legal work and to reduce his living expenses. Barrett sustained himself by continuing his independent contractor work for the Southern California law firm. Despite considerable effort, Barrett never received an offer from a Colorado law firm, and his work with the Southern California law firm ended in the summer of 2006. He was unemployed for the next several months.
Barrett’s income tax returns for the years while working as an independent contractor show a modest income. His 2005 federal income tax return states that his adjusted gross income (i.e., his income after deducting his business costs) was $37,115, and that he owed the IRS $3,011 in taxes. His 2006 federal income tax return states that his adjusted gross income was $39,249, and that he owed the IRS $8,302 in taxes.
In February 2007, Barrett was hired by the Sacramento, California office of the Bullivant, Houser & Bailey law firm. Barrett was retained to do securities registration work at an annual salary of $165,000. This job barely lasted a year, as the onset of the “Great Recession” dramatically reduced the need for his “PIPE” (private investment/public equity) securities work. Over the next two and one-half years, Barrett supported himself with a smattering of independent contractor legal work and unemployment insurance. His 2009 federal tax return indicates that he had negative $1,962 in net business income, and negative $1,372 in adjusted gross income. His 2010 tax return shows $12,434 in net business income and an adjusted gross income of $9,617.2.
In May 2011 Barrett was hired by the Gilbert Kelly Crowley & Jennett law firm in San Francisco to do insurance defense work at an annual salary of $98,000. This job lasted until August 2013, when Gilbert Kelly terminated him as part of the firm’s downsizing. Since then, Barrett has done independent contractor work representing applicants before the Social Security Disability Appeals board. He is paid $35 per hour for this work. This work has generated little income. His 2014 federal tax return shows a negative $138 in net business income, and an adjusted gross income of $5,218. His 2015 federal tax return shows net business income of $8,238, and an adjusted gross income of $7,665. Barrett testified that he has made significant but unsuccessful efforts to generate legal work (or secure employment) since being terminated by Gilbert Kelly.
He has sought to build a legal practice through extensive networking efforts, seminar participation and resume mailing, and he has demonstrated a willingness to enter new areas of law in order to make a living. His efforts have not been fruitful, and he has little confidence that this will change. Barrett attributes his employment problems to his age. He believes that he will work for another ten years. Barrett lives a spartan life. His Bankruptcy Schedule I indicates that he is a self-employed attorney generating $700 in gross income, which he supplements with $175 in food stamps each month. His Bankruptcy Schedule J states that he has $1775 in monthly living expenses, including $750 for rent (he shares an Alameda, California house with two roommates) and $220 for food and housekeeping. Barrett’s monthly expenses exceed his monthly income by $875. Barrett has pared his personal and business expenses by, inter alia, discontinuing his malpractice insurance and his New York, D.C., Colorado, Washington, Idaho, and Utah state bar dues.
Barrett spends little, if anything, for recreation. He has been driving the same car since 2003, and has no savings or retirement accounts. Despite this frugal lifestyle, Barrett is behind on his utilities and car insurance payments. Barrett maintains his law office in his rented residence.
Barrett also has no assets that he could liquidate to repay his DOE debt. He does not own any real estate, and his Bankruptcy Schedule B indicates that his only marketable assets are five shares of Marriott stock valued at $80.00. Barrett borrowed $74,333.00 to finance his education. These loans took the form of Stafford subsidized and unsubsidized loans, a National Direct Student loan, and SLS Supplemental loans. His first student loan dates from October 30,1979, and he received his last student loan on October 20, 1994. Barrett actively managed his student loan debt. All told, Barrett (and his family) made more than twelve years worth of monthly student loan payments exceeding $40,000.
He fully satisfied three of his smaller Stafford Subsidized loans that he incurred to attend law school, sought and obtained payment deferrals or forebearances when necessary, and consolidated his subsidized and unsubsidized loan balances in 2004 with the DOE to help manage the debt.
The evidence indicates that Barrett made loan payments when he was employed by a law firm and had steady income, and made irregular payments when he was self-employed.
Barrett has paid $16,252.17 to the DOE since he consolidated his student loan debt in 2004, and his last payment was made on July 25, 2013. As of January 6, 2016, Barrett’s DOE student loan balance was $264,056.41. Barrett’s consolidated DOE loans carry a 6.6% interest rate, and the monthly interest alone is $1,166.
Barrett has not, however, pursued one of the DOE’s income contingency repayment plans. If Barrett’s income remains at its 2015 level, the DOE contends that Barrett will not be required to make monthly payments under the DOE’s Income-Based Repayment (the “IBR”) plan or its new Revised Pay As You Earn Repayment (the “Repay”) plan. The Repay plan will require that Barrett first make two consecutive monthly payments of at least $5.00. The value of the Repay plan is that the loan will no longer be in default. Both plans last at least twenty years and if completed, the remaining debt will be forgiven. Using Barrett’s 2015 tax return as its guide, the DOE estimates that $703,228.08 in student loan debt will be forgiven under the IBR plan, and $456,638.19 will be forgiven under the Repay plan. Barrett does not anticipate working for another 25 years, and he is concerned with the tax implication of the significant debt forgiveness provisions under either plan.”
