Articles Posted in Student Loans

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Student loans present a uniquely difficult obstacle to debtors in bankruptcy. Federal law completely excepts student loans from discharge, unless a debtor can show “undue hardship” to themselves and their dependents. 11 U.S.C. § 523(a)(8). Most courts around the country use a three-prong test to determine if a debtor has established “undue hardship,” known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs., 831 F.2d 395 (2d Cir. 1987). The Ninth Circuit, which includes California, adopted the Brunner test in In re Pena, 155 F.3d 1108 (9th Cir. 1998). A California bankruptcy court recently considered a debtor’s claim of undue hardship in an order that includes an in-depth review of the Brunner test. In re Shells, No. 11-26042, Adv. No. 14-2111, mem. dec. (Bankr. E.D. Cal., May 7, 2015).

The debtor in Shells obtained student loans for her bachelor’s and master’s degrees. According to the court, she consolidated several private loans into a single U.S. Department of Education (DOE) loan in 2007, with a principal balance of over $96,000 at 7.375 percent. She has reportedly been employed full-time by the county since 1998, and she claimed a net monthly income of just under $6,000. Her husband is disabled, and the two of them have three children.

At the time of the court’s order in May 2015, the student loan balance had grown to more than $137,000. The court noted that the debtor had obtained an Income-Contingent Repayment (ICR) plan in late 2008, which reduced her monthly payment. She reportedly defaulted on the ICR plan twice. She filed for Chapter 7 bankruptcy in March 2011 and received a discharge, which did not include the student loans, that June. She received an Income-Based Repayment (IBR) plan in March 2013 but reportedly defaulted again. After reopening her Chapter 7 case in April 2014, the debtor filed an adversary proceeding against the DOE to discharge the student loan debt. The DOE moved for summary judgment.

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Federal bankruptcy law specifically excepts student loan debt from discharge, unless a debtor can meet the difficult burden of demonstrating “undue hardship” to themselves and their defendants. 11 U.S.C. § 523(a)(8). A recent decision from the Ninth Circuit Court of Appeals involved a Chapter 13 debtor’s claim that her student loan debt was dischargeable. The court affirmed the bankruptcy court’s order discharging most of the debt, reversing the district court’s order. Kelly v. ECMC, et al. (“Kelly I”), Adv. No. 2:10-ap-01681, judgment (Bankr. W.D. Wash., Jul. 18, 2011); ECMC, et al. v. Kelly (“Kelly II”), No. 2:11-cv-01263, order (W.D. Wash., Apr. 20, 2012); Kelly v. Sallie Mae, et al. (“Kelly III”), No. 12-35377, slip op. (9th Cir., Feb. 27, 2015).

According to the district court, the debtor obtained a degree from Seattle University in political science in 1992. By the time she filed for Chapter 13 bankruptcy in March 2008, her total student loan debt was more than $105,000. She filed an adversary proceeding in November 2010, claiming “undue hardship.” To establish undue hardship in most jurisdictions, a debtor must satisfy a three-part test, known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs. Corp., 831 F.2d 395 (2d Cir. 1987):  (1) At current income and expense levels, the debtor would not be able to maintain a “minimal standard of living” if required to repay the student loans; (2) additional circumstances indicate that this financial condition is likely to continue for a substantial part of the repayment period; and (3) the debtor has made “good faith efforts to repay the loans.”

The bankruptcy court found that the debtor had satisfied all three parts of the Brunner test. It ruled that all but $21,706.51 of her student loan debt was dischargeable and ordered her to repay the balance in $250 monthly payments over nine years.

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President Obama issued an executive order on June 9, 2014 intended to alleviate the burden on people struggling to repay student loans. Student loan debt and the cost of college have both grown at explosive rates in recent years, while the job market has remained comparatively stagnant. Defaulting on student loan debt can have devastating consequences, but unfortunately the White House’s executive order does not address many of the most pressing problems. Of course, there is only so much that an executive order can do, but it is important to note that the order only makes student loans, rather than college, more affordable. Most importantly, an executive order cannot modify or repeal the provisions of federal bankruptcy law that exclude student loan debt from discharge.

In the past 15 years, student debt has increased by over 500 percent, according to the Huffington Post. In roughly the same time period, average salaries for young people entering the job market have decreased by approximately 10 percent. People owe more coming out of school but have less opportunity to earn money to repay it. Over 40 million people currently hold student debt in the United States, an amount roughly equivalent to the entire population of California and Nevada. Of those people, an estimated seven million have defaulted on their loans.

President Obama’s executive order expands the “Pay As You Earn” program by directing the Department of Education (DOE) to cap payments on all federal student loans at 10 percent of the debtor’s income. It also directs the DOE to increase publicity for several existing repayment programs, which are intended to help debtors struggling with making payments before they default. The Income-Based Repayment plan, for example, adjusts monthly payments based on a debtor’s income and allows loan forgiveness under certain circumstances. Continue reading

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Student loans are a substantial–and growing–burden for many Americans, especially those who are just now entering the job market after college. The increasing cost of higher education is a major concern for current and future students, and the inability to discharge student loan debt in bankruptcy affects every single borrower in the nation. A recent bill, introduced by Massachusetts Senator Elizabeth Warren, would have offered the possibility of relief from high interest rates for student loan borrowers. The White House endorsed the bill, but it died in the Senate in mid-June. While it would have offered relief to debtors, it would not have addressed the issues of cost or discharge in bankruptcy.

According to a report from the nonprofit organization American Student Assistance (ASA), about twenty million people attend college every year in the U.S., and about twelve million of them borrow money to do so. About thirty-seven million people have outstanding student loan debt, in a total amount approaching $1 trillion. The largest group of debtors by age, accounting for fourteen million people, are under thirty. CNN reports that the average amount of student debt for the class of 2012 was $29,400, an increase of almost $3,000 over the previous year. The general consensus seems to be that student loan debt is hindering the U.S. economy.

Legislation passed by Congress and signed by President Obama last year tied federal student loan interest rates to financial markets, which had the effect of lowering rates for the school year starting in 2013. Interest rates on subsidized Stafford loans doubled on July 1, 2013, from 3.4 to 6.8 percent, after Congress was unable to pass new legislation. As a result, Congress passed a new bill the following month, which the president signed into law on August 9, 2013. It reduced students’ rates to 3.86 percent. Continue reading

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Student loan debt presents a significant problem for individuals seeking bankruptcy protection under Chapter 7 of the Bankruptcy Code. Federal law specifically excludes student loans from discharge, unless a debtor can show “undue hardship” to themselves or their dependents. 11 U.S.C. § 523(a)(8). Most courts have adopted a three-part test, known as the Brunner test, to establish undue hardship. The third part requires a debtor to show a good-faith effort to repay the student loan debt. This requirement is difficult to define, as the Ninth Circuit’s Bankruptcy Appellate Panel (BAP) showed in In re Roth, 490 B.R. 908 (BAP 9th Cir. 2013).

The debtor took out over $33,000 in student loans between 1989 and 1995. Thirteen loans were made through the Federal Family Educational Loan Program (FFELP), and five were made directly through the Department of Education (DOE). She reportedly made no voluntary payments on the FFELP loans, and had defaulted on all of them by 2001. She made one attempt to seek forbearance, by which she could reduce or postpone her payment obligations, but never attempted to restructure or modify the payment terms of the loans. The DOE garnished the debtor’s wages for its five loans. The debtor reportedly claimed that she thought the garnishment covered all eighteen loans. The FFELP creditor was apparently unable to garnish her wages because of the DOE’s garnishment order.

The debtor filed for Chapter 7 bankruptcy in January 2009, seeking discharge of all of the loans. She testified to the bankruptcy court that she suffers from multiple chronic medical conditions and physical injuries, which have impeded her efforts to find employment. The Brunner test, named for Brunner v. N.Y. State Higher Educ. Servs., 831 F.2d 395 (2nd Cir. 1987), requires a debtor to show inability to maintain a “minimal standard of living” if forced to continue loan payments, circumstances that make the current situation likely to persist for much of the repayment period, and “good faith efforts” at repayment. Id. at 396. Continue reading

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A bankruptcy court recently granted a debtor’s request to discharge his student loan debt in a Chapter 7 proceeding. Federal bankruptcy law prohibits discharge of student loan debt except in extremely limited circumstances. The court found that repayment of the full student loan balance would put an “undue hardship” on the debtor because of his ongoing struggles with mental illness. In re Ablavsky, No. 12-18167, memorandum (Bankr. D. Mass., Jan. 23, 2014).

Certain debts are not eligible for discharge in bankruptcy, including student loans. 11 U.S.C. § 523(a)(8). The only exception is if a debtor can show an “undue hardship” on them or their dependents. The statute does not define “undue hardship,” but many courts have adopted a three-part test established in Brunner v. New York State Higher Educ. Services, 831 F.2d 395, 396 (2nd Cir. 1987). The debtor must establish, by a preponderance of evidence, the following: (1) the debtor would not be able, at their present income and expense levels, to maintain a “minimal” living standard while repaying the debt; (2) “additional circumstances” demonstrate that this situation will continue for much of the repayment period; and (3) the debtor has attempted in good faith to pay the debt.

The debtor in Ablavsky sought to discharge nearly $83,000 in student loan debt used for law school. He was diagnosed with bipolar disorder, generalized anxiety disorder, and panic disorder at the age of eighteen, and subsequently received diagnoses of post-traumatic stress disorder and right hemisphere syndrome. He argued to the court that his mental health condition prevents him from maintaining employment that would enable him to pay the student loan debt. Continue reading

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A decision by the U.S. Supreme Court in United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010), has reportedly prompted a review of various Chapter 13 bankruptcy procedures. The court affirmed an order discharging student loan debt, but only because the creditor failed to object or appeal properly. The Judicial Conference Advisory Committees on Bankruptcy and Civil Rules published a set of proposed amendments to the Federal Rules of Bankruptcy Procedure this summer that could modify how parties to a bankruptcy give notice of an adversary proceeding, how debtors give notice of a Chapter 13 plan, and how creditors make objections.

Federal law prohibits bankruptcy courts from discharging student loan debt unless it finds that the debtor would experience “undue hardship.” 11 U.S.C. §§ 523(a)(8), 1328(a)(2). In United Student Aid, the debtor filed a Chapter 13 plan that included repayment of the principal of his student loan debt, followed by discharge of the accrued interest at the close of the case. The creditor filed a proof of claim that included the total amount of the debt, but did not object to the plan. After the bankruptcy court confirmed the plan without entering a finding of “undue hardship,” the creditor still did not object.

Several years later, the creditor attempted to collect the unpaid interest. The debtor asked the bankruptcy court to order the creditor to cease and desist collection action, and the case made its way to the Supreme Court. The creditor argued that the order discharging the debt was void because the debtor did not serve the creditor with a summons during the original case, and also because the bankruptcy court did not make a finding of undue hardship. In a 9-0 ruling, the Supreme Court ruled for the debtor. It held that both of the points raised by the creditor might constitute legal error, but that the creditor should have raised those points in an objection to the bankruptcy plan or an appeal of the bankruptcy court’s order confirming the plan. Continue reading

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Student loan debt is one of the largest forms of personal debt in America, surpassing the total amount of credit card debt in some estimates. With the costs of education rising and overall job prospects improving only slowly, student loan debt is likely to continue to be a tremendous weight on the shoulders of college graduates, current college students, and future students. Discharge of student loan debt in bankruptcy is extremely difficult, requiring a showing of “undue hardship” according to strict definitions. In addition to the difficulties student loan debtors already face, Congress has failed to pass legislation regarding interest rates on new federally-subsidized student loans. This means that interest rates on subsidized loans made on or after July 1, 2013 will double from the current level. Legislation is currently pending in Congress that would allow discharge of student loans in bankruptcy and lower the interest rate on new loans.

The interest increase will affect subsidized Stafford student loans, which are available to undergraduate students who demonstrate financial need. As long as the debtor is enrolled in an undergraduate program at least part-time, the U.S. Department of Education pays the interest on the loans. It also pays the interest during the “grace period,” which lasts for six months after leaving school, and during any approved deferment of loan payments. The current interest rate paid by debtors during any other time period is 3.4 percent, but it is scheduled to double to 6.8 percent on July 1.

The rise in student loan interest rates is likely to make a bad situation even worse, particularly with regards to people who seek bankruptcy protection. At least two bills are currently pending in the U.S. Senate that are intended to alleviate the problem. Senator Elizabeth Warren (D-MA) introduced S. 897, the Bank on Students Loan Fairness Act, on May 8, 2013. This bill would lower the interest rate on subsidized Stafford student loans to 0.75 percent, which Senator Warren says is the same interest rate paid by large banks on loans from the Federal Reserve. This would not address the corresponding issue of the ever-increasing cost of a college education, but it would allow people who are planning to take out student loans after July 1 to avoid significantly higher amounts of debt. Continue reading

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Federal law does not allow the discharge of student loan debt in a bankruptcy case, except with a showing of “undue hardship.” The Ninth Circuit Court of Appeals recently ruled in favor of a debtor, who sought discharge of his student loan debt in a decade-old bankruptcy case. In re Hedlund, No. 12-35258, slip op. (9th Cir., May 22, 2013). The court found that the debtor had satisfied the three-part test used to determine “undue hardship,” known as the Brunner test. Brunner v. New York State Higher Educ. Services, 831 F.2d 395 (2nd Cir. 1987). The case shows how courts can hold debtors to a very high standard in establishing undue hardship. The decision may offer some guidance, however, towards establishing a more uniform set of criteria for student loan debtors in bankruptcy.

The debtor graduated from law school in 1997. He took a position as an intern in a district attorney’s office while waiting for his bar results. He failed the bar exam on his first two attempts, and took a job as a probation officer at $10 per hour. He missed his third attempt at the bar exam when he accidentally locked his keys in his car the morning of the test. His loan deferment ended in 1999, and he found himself owing more than $85,000 to Pennsylvania Higher Education Assistance Agency (PHEAA). The debtor and PHEAA each made several offers regarding payment terms, but never reached an agreement. PHEAA began garnishing his wages in 2002, and he filed for Chapter 7 bankruptcy in May 2003.

The case made it all the way to the Ninth Circuit, which remanded it to the bankruptcy court in In re Hedlund, 368 F. App’x 819 (9th Cir. 2010). A new bankruptcy judge discharged all but $32,080 of the PHEAA debt. The district court reversed the ruling, finding that the debtor did not meet one of the prongs of the Brunner test, requiring proof of good faith efforts at repayment. The debtor appealed to the Ninth Circuit.

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The graduation season is upon us, and newly-minted high school and college graduates throughout the Los Angeles area are celebrating and pondering their futures. Student loans give people a chance to get a good education, but those loans may be with the students for years, even decades. In the event of financial troubles, federal law strictly limits when a bankruptcy court may discharge student loan debt. People planning for their education should consider these factors now, because while times may be difficult for someone to need bankruptcy protection, they must be unbearable to qualify for the discharge of student loans. We previously addressed the laws limiting student loans’ dischargeability, and now will examine the standards debtors must meet.

“Undue Hardship” and the Brunner Test

Federal bankruptcy law does not allow the discharge of student loan debt unless the debtor can show “undue hardship.” 11 U.S.C. § 523(a)(8). Most courts, including those in California, have adopted a three-part test, known as the Brunner test, to determine if a debtor meets this requirement. First, the debtor must show an inability to maintain a “minimal standard of living…if forced to repay the loans” at current income and expense levels. In re Pena, 155 F.3d 1108, 1111 (9th Cir. 1998), quoting In re Brunner, 831 F.2d 395 (2nd Cir. 1987). Next, the debtor must prove the existence of other factors that make repayment essentially impossible for some time. Id. Finally, the debtor must prove that they have made “good faith efforts” towards repayment. Id. Continue reading

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