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Lenders Sometimes Raise Unusual Arguments to Oppose Discharge of Student Loans in Bankruptcy

Student loan debt is a growing burden for people in Los Angeles and all over the country, as the cost of higher education seems to grow faster than the job market. Student loan debt is also one of the few types of debt that is almost never subject to discharge in a bankruptcy case. A recent article in the Wall Street Journal gave several examples of the lengths to which educational lenders sometimes go to oppose discharge of these debts. Some of the stranger arguments did not convince the judges who decided those specific cases, but the mere fact that lenders feel comfortable raising them in court demonstrates the importance of having the help of a skilled and experienced personal bankruptcy lawyer.

Courts rarely discharge student loans at the end of a Chapter 7 or Chapter 13 case, because they are subject to their own separate rule. A debtor must prove that the debt would impose an “undue hardship” on them and their dependents. 11 U.S.C. § 523(a)(8). Courts have often interpreted the term “undue hardship” very strictly. The Brunner test, which most courts have adopted, requires a debtor to prove (1) that repaying the loan would leave the debtor unable to “maintain a minimal standard of living” on current income and expenses, (2) that “the state of affairs is likely to persist” for most or all of the repayment period due to “additional circumstances,” and (3) that the debtor “has made good faith efforts” at repayment. Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2nd Cir. 1987).

In one of the cases discussed in the Wall Street Journal article, a debtor sought to discharge a $2,500 student loan in a Chapter 7 proceeding. The lender, in arguing that the debtor had failed to reasonably maximize her income and minimize her expenses, noted that she had given birth to three children since taking out the loan, despite being unmarried and having health problems that interfered with her ability to work. In re Ivory, 269 B.R. 890, 910 (Bankr. N.D. Ala. 2001). The court rejected this argument and ruled for the debtor, stating that “[t]here is nothing in the Bankruptcy Code that suggests that Congress did not intend for student loan debtors to procreate.” Id. at 911.

Another lender opposed the discharge of over $40,000 in student debt in a case involving a young mother supporting a two year-old daughter on $30,000 a year. It argued that no hardship existed because the debtor’s husband could contribute to the loan repayment upon his release from prison. In re Kainu, No. 08-10020, mem. op. (Bankr. N.H., Apr. 14, 2009). The court ruled for the debtor, finding that since the husband had never assisted with household expenses before, it was not reasonable to expect that he would in the future.

A debtor in a Chapter 13 bankruptcy can restructure bill payments to something more manageable. In a Chapter 7 bankruptcy, a debtor can liquidate certain assets to pay down debt. In either type of case, a debtor might be able to discharge some remaining debts entirely. Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area through Chapter 7 and Chapter 13 bankruptcies for over twenty three years. Contact us today online or at (310) 475-9399 for a free and confidential consultation to see how we may can help you.

More Blog Posts:

Supreme Court Decision Affirming Discharge of Student Loan Debt Prompts Possible Revisions to Chapter 13 Procedures, Los Angeles Bankruptcy Lawyer Blawg, January 12, 2014

With Interest Rates on Many Loans Set to Double Soon, The Dischargeability of Student Loans in Bankruptcy is a Crucial Issue for Future College Students, Los Angeles Bankruptcy Lawyer Blawg, September 23, 2013

Ninth Circuit Allows Partial Discharge of Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, July 12, 2013