Contributed by Doron P. Kenter.
(While it is not typically our practice to discuss personal bankruptcy cases, this case raises interesting questions at the crossroads of equity, family law, and perhaps even civil rights jurisprudence. Accordingly, Sederlund highlights some of the complexities of life, love, and law that make bankruptcy exciting).
What does marriage mean? Does it bear any relevance in matters of federal bankruptcy law? A recent decision by the Bankruptcy Appellate Panel for the Eight Circuit Court of Appeals suggests that non-marital unions – even those not recognized under state law – may be recognized as legitimate unions for certain purposes under federal bankruptcy law.
In Sederlund v. Educational Credit Mgmt. Corp., the appellate panel affirmed the decision of the Bankruptcy Court for the District of Minnesota, in which that court denied Kellie Sederlund a discharge of her student loans for failure to show undue hardship. Among the reasons given by the bankruptcy court – and by the appellate panel – for the denial of that discharge was the fact that Ms. Sederlund had been living with a boyfriend who had paid more than half of their collective household expenses. Even though the state of Minnesota did not formally recognize their relationship as a legal union, the court took that relationship into account in denying Ms. Sederlund a discharge of her student loans.
Section 523(a)(8) of the Bankruptcy Code governs dischargeability of student loans in bankruptcy. That section provides, in relevant part, that a general discharge under section 727 of the Bankruptcy Code does not discharge student loan debt “unless excepting such debtor from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependants. . . .” Courts have applied different “tests” (or no specific tests at all) in order to determine whether the denial of a student loan discharge would result in “undue hardship,” and courts have typically (and understandably) considered the combined household income (including nondebtor spouses) in determining whether he or she would face undue hardship. For example, if Jay-Z were to file for bankruptcy (perhaps after a failed collaboration with Toni Braxton?), he would have a difficult time arguing that he would face financial hardship if he were forced to make payments on his student loans – presumably, Beyoncé would see to it that her husband is properly cared for. On the other hand, what if Stedman Graham, longtime companion of Oprah Winfrey, were to file for bankruptcy (perhaps after investing with Lenny Dykstra?), and then seek to have his student loans discharged? Should a court consider Oprah’s income in assessing the hardship that Stedman might face?
It is this question that the court faced in Sederlund. In Sederlund, debtor Kellie Sederlund had been consistently earning income well below the poverty line, and as of March 2009, was carrying approximately $47,000 of student loan debt. However, Ms. Sederlund had also been living with, and partially supported by, a “long-time, live-in boyfriend.” Based in part on testimony that Sederlund’s relationship was “no less stable” than a marital relationship and a finding that neither Ms. Sederlund nor her boyfriend had any actual intention to leave one another, the appellate panel concluded that Ms. Sederlund and her boyfriend were a “joint economic unit similar to a marital relationship.” Because the boyfriend was likely to contribute to the household finances in the future, the court determined that his contribution should be considered as part of the household income.
Notably, the appellate panel reached this conclusion even though it did not even have to address this question at all. The panel could have simply rested on the other grounds for denying the discharge – namely, that Ms. Sederlund (i) was voluntarily underemployed and (ii) had failed to apply for available student loan repayment plans.
While the appellate panel did recognize that the court could revisit Ms. Sederlund’s case if her relationship with her boyfriend were to dissolve, it neglected to discuss the actual cognizable differences between a married couple and an unmarried couple. In concluding that an unmarried couple can constitute a single economic unit, the appellate panel looked primarily to the practicalities of the debtor’s living situation, and not to the guarantees or legal rights to which she might have been entitled had she and her boyfriend been married or otherwise contractually obligated to one another. By extending such considerations to unmarried couples, Sederlund raises endless additional questions regarding what kinds of relationships will be given the “blessing” of consideration as a single economic unit. Must couples be engaged in an amorous relationship in order for the court to consider them an “economic unit”? What of same-sex couples? Polygamous relationships? Long-term roommates? Surely some of these relationships are more “stable” than many marriages, and many married couples segregate their finances – or even see each other less frequently – than many people living in unions that are not recognized under state law. Should bankruptcy courts be bound by the constraints of legally recognized family relationships? Importantly, what will become of unions that are recognized in one state, but not in another?
While bankruptcy courts may not be a prime battleground for the next generation of civil rights cases, Sederlund suggests that bankruptcy courts are hardly immune from such issues, and may signal an entirely different understanding of what constitutes a “union,” at least under federal bankruptcy law.
More from the Bankruptcy Blog
Copyright © 2019 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, Warsaw, and Washington, D.C.