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Parents Ask Court to Rule that Parent Loans Are Not Subject to Same Bankruptcy Discharge Restrictions as Student Loans

OpenClips [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayA federal district court in California considered a request to discharge federally guaranteed parent loans, which the debtors took out to pay for one of their children’s education. In re Mees, No. 2:13-cv-01892, order (E.D. Cal., Jul. 22, 2014). Student loan debt is not dischargeable in bankruptcy except in rare case of “undue hardship.” 11 U.S.C. § 523(a)(8). The bankruptcy court ruled that the parent loans were not dischargeable, applying the same legal standard used for student loans. The debtors appealed, arguing in part that the bankruptcy court erred in applying this standard. The district court considered this question but ultimately remanded the case to the bankruptcy court, finding that it applied the test incorrectly.

The debtors, a married couple, took out federally guaranteed parent loans for their son, the older of two, to pay for his college education. Parent loans, known as PLUS Loans, typically have a much higher borrowing limit and might be used to cover any gaps in financial aid available directly to the student. Unlike a student loan co-signed by parents, the student is not liable on a PLUS loan. No payments are due until the student completes or leaves school.

The debtors’ son never completed his degree. The balance of the parent loans is about $35,000. By the time of the court’s ruling, both of the debtors had been unemployed for substantial periods of time:  three years for the husband and 30 years for the wife. Their younger son is still a minor. The debtors filed for Chapter 7 bankruptcy in September 2011. They filed an adversary proceeding several months later, seeking discharge of the parent loans. The bankruptcy court ruled against them, citing the three-prong test for determining “undue hardship,” known as the Brunner test after Brunner v. New York State Higher Educ. Svcs., 831 F.2d 395 (2d Cir. 1987).

On appeal to the district court, the debtors first argued that the bankruptcy court erred by applying the Brunner test to their situation because “they are the parents of a student…[and] did not themselves receive the education for which the loan was taken out.” Mees, order at 6. The court declined to rule on this issue, but it did rule in favor of the debtors on their second claim. It held that the bankruptcy court improperly applied the second Brunner prong, which requires a debtor to prove “additional circumstances” that make the hardship “likely to persist for a significant portion of the repayment period of the student loans.” In re Pena, 155 F.3d 1108, 1111 (9th Cir. 1998), citing Brunner, 831 F.2d at 396.

Part of the purpose of the second Brunner prong is to determine whether a debtor has the opportunity to “improve her financial situation, yet choose[s] not to do so.” In re Nys, 446 F.3d 938, 945 (9th Cir. 2006). The court noted that the Ninth Circuit has identified numerous factors that courts should consider when applying the second prong of the Brunner test, including whether or not the debtors have any obligations to dependents. Mees, order at 8, citing Nys, 446 F.3d 938 at 947. The court held that the bankruptcy court’s analysis of the second Brunner prong should have included the debtors’ obligation to their minor son, and it remanded the case with instructions to that effect.

Bankruptcy attorney Devin Sawdayi has helped people in the Los Angeles area through the personal bankruptcy process since 1997. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (310) 475-939.

More Blog Posts:

Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014

Ninth Circuit Bankruptcy Appellate Panel Considers “Good Faith” Requirement for Discharge of Student Loans, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2014

Bankruptcy Court Grants Discharge of Student Loans, Finding that Debtor’s Mental Illness Constitutes “Undue Hardship”, Los Angeles Bankruptcy Lawyer Blawg, March 24, 2014

Photo credit: OpenClips [Public domain, CC0 1.0], via Pixabay.