Student Loans in Bankruptcy

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Generally Student Loans are not discharged by filing a bankruptcy case [11 U.S.C. §523(a)(8)]. It may be possible, however, to discharge the Student Loan in a limited number of circumstances. Once a bankruptcy case is filed, the individual then needs to file an Adversary Proceeding in the bankruptcy court. An adversary proceeding is a lawsuit filed in the Bankruptcy Court in connection with a bankruptcy case. Our firm handles such matters, but they are not part of our standard fees, and are not undertaken in all cases.

Once an adversary proceeding is filed each “side” has certain burdens. The creditor must demonstrate that the loan is on account of an “educational benefit.” This is a fairly broad term, and includes almost all money loaned in connection with obtaining education – including books, tuition, and living expenses. Almost all loans made in connection with education will qualify as “student loans.” The debtor bears the burdent to prove that repayment of the student loan imposes an “undue hardship.” Unless the debtor can prove undue hardship, the loan will survive the bankruptcy case.

On April 16, 2013 the 9th Circuit Bankruptcy Appellate Panel issued a decision regarding the discharge of student loans. The opinion in Roth v. ECMC was written by Judge Renn, who is one of the Judges in the Eugene Division of the Oregon District Bankruptcy Court. As detailed in that case, the 9th Circuit has adopted a three prong test to determine if a Student Loan can be discharged. All three must be met to the satisfaction of the court as follows:

  1. Debtor must prove that she “cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if required to repay the debt.” This requires a demonstration that debtor has made efforts to minimize expenses.
  2. Debtor must prove that “additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period.” This requires a demonstration that the debtor has made efforts to obtain employment and maximize earning potential.
  3. Debtor must prove that she has “made a good faith effort to repay the student loans.”

Evidence of each “prong” needs to be presented to the court, and the court must make specific findings as to each prong. Courts generally review each “prong” in order. In most cases, it is the the “third prong” that is the deciding factor. In determining whether the debtor has made “good faith efforts” the court will consider:

  1. whether the debtor has made any payments on the loan prior to filing for discharge (i.e. payment history)
  2. whether the debtor has sought deferments or forbearances.
  3. the timing of the debtor’s attempt to have the loan discharged; and
  4. whether the debtor’s financial condition resulted from factors beyond her reasonable control.

In a number of cases, as part of the third prong, the courts have required that the debtor demonstrate that she has explored other alternatives first (i.e. administrative discharge, and income sensitive repayment alternatives). Courts have particularly focused on whether the debtor has applied for and enrolled in the Income Contingent Repayment Plan (ICRP). In fact, a number of cases in the 9th Circuit have denied the discharge of student loans simply because the debtor had not enrolled in and made payments as part of the ICRP. Information regarding the ICRP can be found here

If you have significant student loan debt that places an “undue burden” on your ability to maintain a minimal standard of living, then perhaps filing an adversary proceeding in connection with a bankruptcy case is a good option. However, before immediately looking to a bankruptcy as the “solution” for student loan debt, make sure the explore other alternatives first.

Bankruptcy is generally an alternative of “last resort.” When it comes to the discharge of student loans the Court is going to make sure you truly have no other alternatives.  If you feel that you would “qualify” for the discharge of your student loans under this standard, give us a call so we can discuss your case.

Even if you can’t get rid of your student loans, a bankruptcy may still be a good alternative, as the vast majority of debt can be discharged, making it easier to pay non-dischargeable student loans.

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