National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Student loans

by on

Guarantor May Contest Dischargeability of Student Loan

A guarantor on a student loan is an “accommodation party” who comes within the purview of the student loan nondischargeability provision when she is required to pay the loan on behalf of the debtor. De la Rosa v. Kelly (In re Kelly), No. 17-32295, Adv. Proc. No. 17-3320 (Bankr. S.D. Tex. March 23, 2018).

Mary De la Rosa was the guarantor on a student loan acquired by her friend and fellow church member, Tabitha Kelly. When Ms. Kelly defaulted on the loan, the lender sued Ms. De la Rosa and she paid the debt pursuant to a state court judgment. Ms. Kelly and her husband later filed for chapter 13 bankruptcy and Ms. De la Rosa filed an adversary complaint seeking to have the debt deemed nondischargeable under section 523(a)(8)(A)(ii). [Read more…] about Guarantor May Contest Dischargeability of Student Loan

by on

Brunner Test Does Not Require that Debtor Take Advantage of IBR

Willie West was 60 years old, had been largely unemployed for thirty years and owed over $60,000 in student loans. He lived rent-free with his aunt and received $197.00 under the Supplemental Nutrition Assistance Program. When he sought to discharge the loans in bankruptcy the case came before the court on the parties’ cross-motions for summary judgment. West v. U. S. Dept. of Ed., No. 17-20506, AP No. 17-78 (Bankr. W.D. Tenn. Feb. 4, 2018). [Read more…] about Brunner Test Does Not Require that Debtor Take Advantage of IBR

by on

Court Not Required to Dismiss Case Exceeding Debt Limits

A court is not required to dismiss a chapter 13 case where the debtor’s student loan debt causes his total unsecured debts to exceed the statutory debt cap. In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. Dec. 27, 2017), appeal filed, Stearns v. Pratola, Case No. 1:18-cv-213 (N.D. Ill. filed Jan. 11, 2018). [Read more…] about Court Not Required to Dismiss Case Exceeding Debt Limits

by on

District Court Reassesses Evidence of Undue Hardship

The district court reassessed the evidence presented at the adversary hearing and overturned the discharge of the debtor’s student loan debt. DeVos v. Price (In re Price), No. 17-3064 (E.D. Pa. Jan. 24, 2018). Chapter 7 debtor, Kristin M. Price, was a mother of three pre-school children, separated from her husband, and employed part-time as a vascular sonographer. She sought to discharge her almost $26,000.00 federal student loan. The bankruptcy court applied the three-part Brunner test specifically finding that Ms. Price’s financial distress was likely to persist for at least five of the seven years remaining on her loan contract. Because this constituted a “significant portion of the repayment period,” the court granted discharge under section 523(a)(8). [Read more…] about District Court Reassesses Evidence of Undue Hardship

by on

Debtor’s Treatment of Student Loan Outside Plan Not Confirmable

The court could not confirm the debtor’s plan proposing to pay all claims in full except her student loan debt for which she proposed payments on interest only outside the plan. In re Ryan, 17-1507 (Bankr. M.D. Fla. Nov. 7, 2017).

Jenna Ryan’s chapter 13 petition schedules listed total debts in the amount of approximately $173,000, including a student loan debt from the Department of Education of almost $80,000. Her disposable income was $4,417.72. Her plan proposed to pay $1,403.09 per month for sixty months to pay off all debts in full except for the student loan debt. As to that claim, the plan proposed that Ms. Ryan would maintain payments outside the plan. She took the “position that there are no payments due under the terms of the student loan, given the filing of the bankruptcy, so her payments are voluntary and enough to cover the accruing interest payments.” [Read more…] about Debtor’s Treatment of Student Loan Outside Plan Not Confirmable

by on

Win for Debtor in Student Loan Arena

A loan that is not itself an “educational benefit” does not fall under section 523(a)(8)(A)(ii)’s exception to discharge as an “obligation to repay funds received.” Essangui v. SLF V-2015 Trust, No. 16-12984, Adv. Proc. No. 16-201 (Bankr. Md. Oct. 2, 2017).

Chapter 7 debtor, Yolande Essangui, enrolled in a Medical Education Readiness Program (MERP, or Program) in preparation for entering Ross University School of Medicine. Because MERP was not a Title IV institution, students were not eligible to receive federal student loans to attend the Program. Ms. Essangui financed her attendance in MERP with the private loan at issue, which, by the time of her bankruptcy, totaled $37,175.25. She used the money to pay tuition, buy books and pay for housing and other expenses during her schooling. Ms. Essangui completed the Program and enrolled in Ross University, but never graduated.

As it was undisputed that the loan was not an “educational benefit overpayment or loan” under section 523(a)(8)(A)(i), or a “qualified education loan” under section 523(a)(8)(B), the issue was whether the debt was “an obligation to repay funds received as an educational benefit, scholarship, or stipend,” under section 523(a)(8)(A)(ii).

After a walk through the history of student loan treatment in bankruptcy, the court arrived at the relevant language in BAPCPA, which it found was intended to “enhance fairness” to both creditors and debtors. Citing Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 635 (B.A.P. 9th Cir. 2015), the court adhered to the minority position that Congress’s separation, in 2005, of “an educational benefit overpayment or loan” in paragraph (A)(i) and “funds received” in paragraph (A)(ii) indicates that Congress did not intend the latter paragraph to cover loans.

The court rested its decision on principals of statutory interpretation in which Congress is presumed to organize statutes meaningfully and give different meanings to different words. The court found it significant that the funds received in paragraph (A)(ii) must be “as” an educational benefit rather than be “for” an educational benefit. Under this language, the funds themselves must be the educational benefit rather than be provided for the purpose of acquiring the educational benefit. Furthermore, paragraph (A)(ii) delineates three types of funds: an “educational benefit,” a scholarship and a stipend. Where scholarships and stipends typically need to be repaid only upon the debtor’s failure to complete her education, the court reasoned that Congress intended “educational benefit,” to be similarly contingent. This contingent “obligation to repay funds” is not equivalent to a “loan.”

The court further found that applying paragraph (A)(ii) to loans would render the language in paragraph (A)(i), which specifically covers government-related loans, and paragraph (B), which covers “any other educational loan that is a qualified education loan,” superfluous. Paragraph (A)(ii), if given the broad interpretation endorsed by the creditor here, would already cover those loans. The minority position also comports with the general principal of narrowly interpreting exceptions to discharge.

The court concluded that “the language of the statute suggests that Congress worked to strike a delicate balance between the fresh start policy for debtors and the protection of certain educational programs and lenders offering loans for such programs.” Where the creditor did not argue that the funds themselves were an “educational benefit,” and section 523(a)(8)(A)(ii) does not apply to loans, Ms. Essangui was entitled to summary judgment.

Essangui Bankr Md opinion Oct 2017

by on

Court Properly Declined to Compel Arbitration of Educational Loan Issue

Potential discharge of an educational loan is a core bankruptcy proceeding over which the bankruptcy court may exercise jurisdiction despite an arbitration clause in the lending agreement. Navient Solutions v. Farmer, No. 17-764 (W.D. Wash. Oct. 16, 2017).

In her Chapter 7 bankruptcy, Janay Farmer sought to discharge a loan she had taken out to finance her post-graduation bar examination. The lender, Navient, moved to compel arbitration by the terms of the lending agreement. Reasoning that the issue of treatment of the loan was a core bankruptcy matter, the bankruptcy court found that it had discretion to exercise jurisdiction over the case. In re Farmer, 567 B.R. 895 (Bankr. W.D. Wash. 2017). [Read more…] about Court Properly Declined to Compel Arbitration of Educational Loan Issue

by on

Court Applies Realistic Fact-Based Analysis to Student Loan Discharge

The Brunner undue hardship test requires examination of the unique facts and circumstances of each case, and the analysis for whether the debtor’s financial condition is likely to persist should not look beyond the life of the loan. ECMC v. Murray, No. 16-2838 (D. Kans. Sept. 22, 2017).

After an evidentiary hearing and inquiry into Alan and Catherine Murray’s expenses and income, the bankruptcy court found they could not maintain a minimal standard of living if they were required to pay off their student loans in their entirety, including interest, but that they could afford to pay off the principals.

ECMC appealed the discharge of all but the principal to the District Court. [Read more…] about Court Applies Realistic Fact-Based Analysis to Student Loan Discharge

by on

Court Rejects “Certainty of Hopelessness” and Limits Repayment Period

“[N]otwithstanding a debtor’s potential eligibility for an extended term student loan repayment program, if a debtor chose not to enter such a program in good faith, the repayment period under the second Brunner prong is the remaining contractual term of the debtor’s loan.” Price v. Devos (In re Price), No. 15-17645, Adv. Proc. No. 16-11 (Bankr. E.D. Pa. June 23, 2017).

The debtor, Kristin M. Price, was a twenty-nine-year old, soon-to-be-divorced, mother of three young children. She was educated and trained to work in vascular sonography and was employed part-time in that field. She filed for chapter 7 bankruptcy in October, 2015. At that time, she had an outstanding student loan from the Department of Education which she sought to discharge under section 523(a)(8).

The court applied the three-prong test set forth in Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). It quickly dispensed with the first and third prongs of that test: Ms. Price could not make payments on the loan and maintain a minimal standard of living, and she acted in good faith with respect to the loan.

The dispute centered on the second prong of the Brunner test: whether the current state of Ms. Price’s financial affairs was likely to persist for “a significant portion of the repayment period.” For purposes of analysis, the court divided this prong into two questions: 1) whether the state of affairs is likely to “persist,” and 2) whether it will persist for a “significant portion of the repayment period.”

With respect to the fact-intensive question of the projected persistence of Ms. Price’s financial situation, the court balanced several factors. On the one hand, Ms. Price was young, healthy, currently employed, and licensed in her field (though not licensed in the more general area of sonography that would have opened more employment opportunities to her). On the other hand, she was separated, with three young children with expenses that were likely to change but not decrease for many years, no easy access to the additional education necessary to expand her license to a broader range of employment opportunities, and no way to increase the number of hours she worked in her current job. The court found that, on balance, Ms. Price’s financial distress was likely to persist.

Turning to the second question, the court broke it into two more questions: 1) what is the relevant “repayment period,” and 2) what portion of that period could be deemed “significant?”

The court began with a look at the historical context of Brunner. In 1987, when Brunner was decided, a student loan could be discharged upon a finding of undue hardship or if it had been in pay status for five years prior to bankruptcy (“temporal discharge”). Subsequently, several changes have occurred with respect to student loan debt: 1) Congress lengthened then eliminated the temporal discharge, 2) the rise of income-based repayment programs resulted in extensions of time for some loans of up to twenty-five years, and 3) the student lending industry, and nationwide student loan debt, ballooned. The court noted that, while the statutory temporal discharge was eliminated in favor of the broader “undue hardship” standard, the Brunner analysis includes its own temporal limitation which continues to require a court to determine some limit to the time within which a debtor can be saddled with student debt.

Here, Ms. Price argued that to satisfy the second prong of Brunner, her state of affairs must persist only as long as the contractual loan term: seven years. The DOE, on the other hand, argued that she must show that it is likely to persist until expiration of the longer time period available under an income-based, extended term loan repayment program (IBRP): up to twenty-five years.

The court turned to practicalities. It noted that if a student loan is found nondischargeable due to the availability of an IBRP even though the debtor has no realistic likelihood of ever making payments under the program, both parties lose. The creditor does not recover the loaned funds and the debtor is deprived of the fresh start crucial to bankruptcy. Under the facts of this case, the court found that Ms. Price would not have benefitted from participation in a long-term IBRP and that imposing an IBRP’s temporal limit on the Brunner inquiry would essentially force Ms. Price either to repay the loan under its current terms, or enter into an IBRP notwithstanding that such programs are intended to be voluntary.

The court further found that use of the contractual term over the lengthier IBRP term, would reduce the necessity of delving ever deeper into guesswork concerning a debtor’s future financial health. The court rejected the possibility that declining to take IBRPs into consideration in the analysis of the second Brunner prong would lead to gamesmanship, finding that this contingency was adequately dealt with in the good faith requirement of third Brunner prong. The court therefore concluded that the second prong of Brunner required that it determine whether Ms. Price’s financial state of affairs was likely to persist over a significant portion of the repayment period as specified in the lending agreement.

It then turned to the issue of what constitutes a “significant portion.” Rejecting a strict formulaic approach, the court settled on a five-year look-forward period and found the factual considerations giving rise to its finding of financial hardship were likely to persist over that period.

In granting Ms. Price discharge of her student loan, the court specifically rejected an interpretation of the second prong of Brunner that would require a “certainty of hopelessness.”

This case is currently on appeal to the District Court for the Eastern District of Pennsylvania, Case No. 17-3064.

Price Bankr ED Pa opinion