Bloomberg reported:
Monica Stitt, a 45-year-old woman, is unemployed, disabled, and living far below the poverty line. Still, a federal district judge decided in June that she could not cancel more than $37,000 in student debt in bankruptcy, because she hadn’t made a good-faith attempt at repaying the loans.
Her entire income—about $10,000 per year, according to the judge—consisted of Social Security disability benefits and public assistance. She has been unemployed since 2008.
Stitt had borrowed $13,250, which had increased with interest to $37,400 by the time she filed for bankruptcy. After the bankruptcy judge ruled she couldn't shake the debt, the woman appealed to the U.S. District Court in Maryland without a lawyer, where a District judge upheld the bankruptcy court's ruling on June 9.
The debtor didn’t meet the “undue hardship” test required by the bankruptcy code, U.S. District Judge Peter J. Messitte said in his opinion. Unlike credit card debt, student loans can almost never be discharged in bankruptcy. The only way people who have filed for bankruptcy can get rid of the debt is by proving that repaying them would impose "undue hardship" on their lives.
Contrast the bankruptcy case of Mrs. Stitt with The Carlyle Group's Church Street Health Management, a children's Medicaid dental provider. It went bankrupt in 2012. At the time Carlyle had nearly $40 billion in dry powder.
Church Street Health Management LLC’s filing with the Middle Tennessee U.S. Bankruptcy Court this week listed roughly $85 million of assets and $300 million of liabilities.How much of that $300 million in liabilities came from a dividend recapitalization, where a private equity underwriter loads the affiliate with more debt, using proceeds to pay themselves a handsome dividend? Church Street, a serial ethics violator, was booted out of Medicaid for five years.
The system allowed Church Street to reorganize in bankruptcy, dumping untold amounts of debt. Mrs. Stitt wasn't so lucky.
Update: Uncle Sam will garnish Social Security checks for citizens with old student loans, even if they're in their 80's and have dementia. It's a profitable product line for the U.S. government. With annual returns of 23% Uncle Sam is in PEU territory.
