Can student loans be eliminated in bankruptcy?
Student (educational) loans are not dischargeable unless nondischargeability would impose “an undue hardship on the debtor and the debtor’s dependants.” 11 U.S.C. §523(a)(8). This provision was enacted by Congress in response to a rising number of consumer bankruptcies filed by former students for the primary purpose of avoiding the repayment of student loans. In attempting to avoid this abuse of the bankruptcy system, Congress set a “high bar for discharging student loan debts.” In re Carnduff (9th Cir.BAP 2007) 367 B.R. 120, 138. See, also In re Nys (9th Cir.BAP 2004) 308 B.R. 436, 441, aff’d (9th Cir. 2006) 446 F.3df 938, 944).
Nondischargeability under this provision of the Code extends to:
1) Debts for any educational benefit overpayment or loan made, insured or guaranteed by a “governmental unit,” or made under any program funded in whole or in part by a governmental unit or nonprofit institution. It is the “purpose” of the loan, not the “actual use” of the funds that determines whether a loan qualifies as “educational” under the statute;
2) Any obligation to repay funds for educational benefit, scholarship or stipend;
3) Any “qualified education loan” as defined by Internal Revenue Code 26 U.S.C. §221(d)(1) incurred by an individual debtor. Such a loan is defined as a debt incurred solely to pay qualified higher education expenses on behalf of the debtor, spouse or any dependent of the debtor, including debts incurred to refinance a qualified education loan.
Exception: Loans from relatives or entities controlled by the debtor are not “qualified education loans” and, accordingly, are not protected from the discharge.
Exchange of funds between borrower and lender is not required: Thus, a university may permit a student to attend classes without paying tuition or fees, essentially “advancing” funds or credits in the student’s name. See, McKay v. Ingleson (9th Cir.2009) 558 F.3d 888, 890.
“Undue Hardship” Exception to Nondischargeability: Student loans may be dischargeable where a court finds “undue hardship” proven at the time of trial in an adversary proceeding filed by the debtor. The legal test for “undue hardship” is defined by case law and called the “Brunner Test.” Brunner v. New York State Higher Ed. Services Corp. (2nd Cir.1987) 831 F.2d 395, 396. Adopted by nine Circuits, including the Ninth Circuit, this test required the debtor to prove all three prongs:
(1) Based on current income and expenses, the debtor cannot maintain a minimal standard of living for the debtor and debtor’s dependants if forced to repay the loan; and
(2) Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
(3) The debtor made good faith efforts to repay the loan.
Among many relevant factors that may be considered in individual cases: (1) Serious mental or physical disability preventing employment or advancement; (2) debtor’s care obligations to dependants; (3) lack of better financial options elsewhere; (4) limited number of years available to debtor’s work life allowing repayment of loan; (5) lack of exempt or nonexempt assets that can be used for repayment; (6) poor quality of education; (7) lack of usable or marketable job skills; and (8) age or other factors preventing retraining or relocation as a means for repaying the loan.
“Undue Hardship” Determination in Chapter 13: In Chapter 13 cases, the bankruptcy judge must make an independent determination of “undue hardship” before plan confirmation, even where the creditor/lender fails to object or appear in the adversary proceeding.
4) Interest on student loans is likewise nondischargeable.
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