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Tuesday, December 1, 2009

Student Loans in Chapter 7 bankruptcy

Most people are aware that student loans are no longer dischargeable in chapter 7 bankruptcy case. The old rule prior to 1998 had been that if they were at least 7 years old from the date they were first due in repayment that they could be wiped out. That changed and with limited exception they can no longer be discharged. The exception to the rule against those debts being discharged is found in 11 USC 523(a)(8). In the Eight Circuit the court applies a "totality of the circumstances" test do determine if an individual meets the requisite "undue hardship" entitling him to a discharge of the student loan debt.

The court is fairly strident in not allowing student loans to be discharged and I've always told my clients that if you can work don't get your hopes up for an undue hardship as it isn't going to happen...no matter what size your student loan debts may be. Case in point is the recent case Eud. Credit Mgmt. Corp. v. Jesperson, 571 F.3r 775 (8th Cir. 2009) wherein the court denied a discharge under the applicable "undue hardship" standard where the debtor had accumulated student loan debt of over $304,000.00. Quite a hardship in any one's book I'd say to even contemplate paying back a student loan debt of that size. However, the debtor was in good health and able to earn an income as a licensed attorney. The primary focus of the court's opinion was the "ICRP", the income contingent repayment plan that is authorized by Congress under the William D. Ford Direct Loan Program that provides that if the borrower has not repaid the loan in full under that plan at the end of twenty-five years the unpaid portion of the loan would be cancelled. The court held that if the debtor's budget allowed him to make payments under that plan whilst still being able to maintain a minimum standard of living that the debtor's student loans would not be discharged under the prevailing statute and the totality of the circumstances test when applied to his particular circumstance. The lower court had taken the same issues into consideration and had found differently, stating that the debtor would be, in effect, be sentenced to 25 years in a debtors' prison without walls. The higher court overturned the lower court decision also citing the facts that the debtor's budget had underestimated his income and overestimating his reasonable and necessary living expenses concluding that there would be a surplus of at least $900 a month available to pay on his debt. The court of appeals also disagreed with the lower court where it had found that it was unlikely that the debtor's rate of pay would increase in the future. Taken altogether it appeared to the judges on the court of appeals that this was not a case that lent itself well to discharge of the student loan debts the sheer magnitude of the size of the debt notwithstanding and not enough to tip the balance in the debtor's favor in this particular case.

This case taken in isolation is, of course, rather extreme in it's facts...not many have that huge a load of student debt. However, it has set a precedent and anyone attempting to argue that their loans should be discharged simply due to their sheer size will need to have other mitigating circumstances to prove the meet the requsites for the standard of "undue hardship". Job loss, disability, advanced age, other physical or mental incapacity, etc. are the situations that lend themselves best to bolster the argument.

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