Check that Lender’s Arithmetic!

The problem of the debt which ought to have been liquidated according to the terms of a Chapter 13 plan, but surfaces with a vengeance due to undisclosed fees and lender accounting shenanigans, is familiar in mortgage contexts but may also involve student loans, as the recent case of Carlson-Callow v. Sallie Mae Servicing, Educational Credit Management Corporation, and Northwest Loan Association (U.S. Bankr. Idaho, 2008 Bankr. Lexis 1815) illustrates.

On first reading this looks like one of those rare instances where a debtor obtained real relief from an onerous student loan. The debtor, 60 years old and suffering from a serious congenital disorder likely to progressively limit her ability to work full time in an indifferently-paid profession, owed $88,776 in 2001, when she consolidated all her loans, and $123,070 in 2005, because of interest accruing during forbearance. The creditors had already agreed to settle for the original principal and reduce the interest rate to 5%, but this did not result in an affordable repayment amount.

After scrutinizing the debtor’s budget, disallowing minimal support to an adult daughter, and putting the last nail in the coffin of an unprofitable business, the court concluded the debtor could currently afford to pay $447/month toward her student loans.  The court then discharged all but $37,500 of the debt on grounds of undue hardship, maintaining that that amount could be paid off over five years on a graduated payment plan rising to $672 in the final 32 months of the plan.  The graduated payment took into account that other debts would be paid off earlier; it did not take into account the debtor’s deteriorating health.

The monthly amount required to fully amortize a $37,500 debt over five years at 5% interest is $707.  The payment schedule as entered into the court record leaves an undischargeable debt of $9,252.78, assuming the debtor is able to make all payments as scheduled. Something doesn’t add up here.  It looks as if this is one more area in which attorneys are going to have to go through all the documents with a fine-toothed comb, checking all the figures, to make sure their clients are getting the relief they are being told to expect.