USING CHAPTER 13 BANKRUPTCY TO REORGANIZE PAYMENTS ON STUDENT LOANS
Under the United States Bankruptcy Code Section 523(a)(8), student loans are generally non-dischargeable in a bankruptcy. Since there is no dischargeability it is important to find a method to deal with the servicing of the debt.
Chapter 13 bankruptcy can be a good vehicle for managing payments on student loan debt, because the Debtor is only paying the debt according to their available disposable income while they are in the bankruptcy. I have even had clients who have filed a Chapter 13 because of student loan debt and upon completion of the plan, have refiled Chapter 13 because their disposable income still did not allow to pay the normal scheduled payment.
As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation. Bankruptcy, as many other areas of the law, can be very case or fact specific. I pride myself on giving you the answers to your questions that are based on your individual circumstances.
Under the United States Bankruptcy Code Section 523(a)(8), student loans are generally non-dischargeable in a bankruptcy. The exception to non-dischargeability of the defined student loans under the Code arises where the exception from discharge would impose an undue hardship on the Debtor or the Debtor’s dependents.
The Bankruptcy Code does not define the term “undue hardship.”
The Fifth Circuit has adopted the three-prong test articulated in Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2nd Cir. 1987) under which a debtor is required to show that:
(1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loan;
(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and
(3) the debtor has made good faith efforts to repay the loan. See In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003).
The Debtor must prove the factors by a preponderance of the evidence. If a Debtor can show that their monthly expenses exceed their income, then the Debtor has met the burden of the first prong. Id. at 92.
Some courts have concluded that certain monthly expenses are unreasonable for purposes of determining whether a Debtor can maintain a minimal standard of living.
For example, one court has determined that home internet service and movie rental expenses are unreasonable expenses under Section 523(a)(8). In re Buchanan, 276 B.R. 744, 751-52 (Bankr. N.D. W. Va. 2002).
Others have found that cable television was not necessary to maintain a minimal standard of living. In re East, 270 B.R. 485, 494 (Bankr. E.D. Cal.2001) and Commonwealth of Virginia State Education Assistance Authority v. Dillon, 189 B.R. 382 (Bankr. W.D. Va. 1995).
The existence of a debilitating medical condition is not a prerequisite to establishing the existence of “undue hardship” under § 523(a)(8). See, e.g., McGinnis v. PHEA (In re McGinnis), 289 B.R. 254, 256 (Bankr. M.D.Ga. 2002).
As long as a debtor can demonstrate that some condition will, in all likelihood, inhibit his long-term ability to pay the student-loan debt, the second prong of the Brunner test has been satisfied.
Nonmedical factors to consider in this regard are
(1) whether the debtor failed to derive any economic value from his educational debts,
(2) the debtor’s overall lack of education and/or training,
(3) the number and health of the debtor’s dependents,
(4) whether the debtor lacks marketable skills, and (5) the debtor’s age. Turretto v. U.S. (In re Turretto), 255 B.R. 884, 889 (Bankr. N.D. Cal. 2000).
The focus of the third prong of the Bruner test centers around the fact that the Debtor has not negligently or willfully caused his own default.
The default must be beyond the reasonable control of the Debtor. Stein v. Bank of New England (In re Stein), 218 B.R. 281, 288 (Bankr. D. Conn. 1998).
So, although it may be difficult to discharge student loans, it is not impossible given a fact specific situation that does demonstrate undue hardship on the Debtor.
As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation. Bankruptcy, as many other areas of the law, can be very case or fact specific. I pride myself on giving you the answers to your questions that are based on your individual circumstances.
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