A 51-year-old former public servant from Texas served as her own lawyer and won a personal bankruptcy ruling that erased her $41,509 in student loan debt.
“I knew I needed to wipe the slate clean, to start over,” Katy Adams told Yahoo Finance, “because of the circumstances I was under... it was truly overwhelming.”
The case further highlights the emerging trend of student loan borrowers successfully finding relief through personal bankruptcy. Several cases in the last two years — including a case of a grandmother in Nebraska and a groundbreaking case in New York — show that bankruptcy judges are increasingly willing to consider student loan debt along with other debts in personal bankruptcy.
“I don’t believe all student loans need to be forgiven… but this is a prime example of how broken the system is and how the federal government is taking advantage,” Adams said.
Adams spent two decades in public service, working as a juvenile probation officer from 1993 to 2014, before personal events led her to Fayetteville, Ark. to start over. She started a business cleaning homes, but her loans kept growing: What was $23,463 in December 2000 turned to more than $40,000 by 2019.
She filed chapter 7 bankruptcy in May 2019 and an adversary proceeding in August 2019, serving as her own lawyer after she was told by a bankruptcy attorney that the case was hopeless.
In February 2020, Adams' creditor, Education Credit Management Corporation (ECMC), agreed to discharge all $41,509 of her consolidated Federal Family Education Loan and a bankruptcy judge approved.
“The thing that struck me is that she’s been paying this for three decades, she paid more than she originally took out, they collected the interest and made a profit, and now they’re coming after her still for more than the principal,” Jason Iuliano, an expert on student loans and bankruptcy, told Yahoo Finance.
Iuliano, who created a startup to help borrowers navigate student loans in bankruptcy, added that there “are so many people just in the exact same situation … and it’s just very disheartening."
Katy Adams took on her own bankruptcy case in court and won. (Katy Adams)
Road to bankruptcy
Adams spent most of her childhood in Arkansas before going back to where she was born, Texas, for college at Baylor University.
She graduated in 1992 with a bachelor’s degree in psychology, becoming the first in her family to complete a bachelor’s degree, and then entered the workforce with $14,000 in student debt.
Adams started working as a juvenile officer with a starting salary of around $36,000.
In 1998, she decided to get her master’s degree in behavioral science, specializing in criminology from the University of Houston at Clear Lake. The degree left her with around $8,000 in student debt.
In December 2000, Adams consolidated her loans into $23,500 in student debt at an interest rate of 9%.
Over the next decade, Adams diligently chipped away at her debt, working her public service job, paying around $185 each month, but the debt burden continued to grow anyway.
In 2017, she attempted to apply for Public Service Loan Forgiveness (PSLF) since she had spent two decades working for the government — but only six years of her payments qualified, falling short of the required 10 years.
Around that time, she left employment and moved to Arkansas to be closer to family. But employment opportunities were slim, she said, given her background.
This image from the Federal Student Aid page of the Department of Education shows the page to apply for PSLF. (Department of Education via AP) ·ASSOCIATED PRESS
'I could plant about 20 trees for all the paper I used'
In May 2019, she filed for chapter 7 bankruptcy. And after being told her student debt would not be discharged in bankruptcy, she decided to pursue that as her own lawyer.
“They were like, it can’t be done,” she recalled a conversation from one Fayetteville-based attorney, whom she approached to help her with her adversary proceeding.
Austin Smith of Smith Law Group, who represents student debtors in their bankruptcy cases, noted that individual debtors representing themselves — so-called pro se debtors — seem to fare relatively decently.
“I must confess pro se debtors seem able to obtain agreements to discharge federal loans more easily than lawyers,” Smith told Yahoo Finance. “Makes you wonder whether lawyers like me help or hurt in certain situations.”
After putting together spreadsheets with her projected earnings and receipts of her student loan payments from 2000 to 2019 — including approximated payments for 1993 to 2000, since the paperwork wasn’t provided by her loan servicer — Adams felt some optimism.
“I could plant about 20 trees for all the paper I used,” she joked. “Just the complaint, that piece … was a four-inch binder with tabs and everything. It was truly overwhelming.”
Source: Duke Law Journal/DECEMBER 2020/ "THE STUDENT LOAN BANKRUPTCY GAP" by JASON IULIANO
Rosenberg, who has written a book about his debt journey, told Yahoo Finance that while "congressional action on student loan bankruptcy reform is long overdue, I want those struggling with student loan debt to know that they can fight back, and more importantly they can win."
Once she filed for bankruptcy, Adams' loans were transferred to ECMC, which manages federally-backed student loan accounts that are in default or bankruptcy.
In a court filing dated January 30, 2020, ECMC “proposed alternative repayment programs” to Adams and tried to settle the case outside the court — “exploring extra-judicial alternatives to trial.” Adams responded that she was “not willing, at this time, to consider and/or accept alternative repayment programs available."
At one point, Adams said, ECMC offered to pay about half of the debt, $22,000, with the rest written off. (Creditors often prefer settlements to avoid trials that set precedents.)
"It's another instance where the creditors are willing to settle cases that they know or they think they're likely to lose in order to avoid the development of adverse precedent," Iuliano said. "They don't want other attorneys to take notice that undue hardship discharge is possible."
Adams “respectfully declined," she explained, "because I had given them all the documentation showing that I had [already] paid $38,000. I was ready to go in front of the judge — what did I have to lose?”
The outside the of the United States Bankruptcy Court for the Eastern & Western Districts of Arkansas. ·Michael Dean Shelton via Getty Images
Standards judges use for bankruptcy cases
In most personal bankruptcy cases involving student debt, a judge applies the Brunner test — a three-pronged test applied to student loan borrowers who filed adversary proceedings seeking to discharge educational debt — to determine if specific student loans caused a borrower to suffer undue hardship.
In the case of Adams, the court used a slightly different standard called the “totality of circumstances.” According to the National Consumer Bankruptcy Rights Center, this test involves three considerations: The debtor’s financial resources past, present, and future, a calculation of their — and their dependent’s — reasonable living expenses, and other relevant facts and circumstances surrounding the bankruptcy case.
While nine district courts in the U.S. use this alternate standard, generally, “there weren’t differences in terms of outcomes” between the two tests, Iuliano noted, based on his research.
After a trial date was set, Adams decided to file a motion for summary judgement after learning that she could do so from the Rosenberg case, and that request meant that she could plead her case via paper instead of appearing in-person.
“You never know what side of the bed the judge woke up on, which has a lot to do with the outcome of the case,” she noted. “I did not want to miss one detail, I am much more adept at telling my story in writing than verbally.”
The following morning, before the judge could rule on whether Adams met the undue hardship standard, the attorneys had requested for the case to be dismissed and for her loan to be fully discharged.
After her legal victory and successful fresh start, Adams is now considering law school.
Editor's note: A previous version of this post misstated Adams' first job out of college.
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Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.
