Additional Criteria Used to Defend Discharge of Federal Student Loans in Bankruptcy

I was just reading through a 2006 case where the Appeals court listed out a set of “additional circumstances” that is appropriate to rely upon to make the argument for discharge of the student loans in bankruptcy under undue hardship.

If you are thinking of pursuing a discharge of your federal student loans and claim the loan present an undue hardship, you should point out this case to your bankruptcy attorney.

Specifically the section in the Appeals Court opinion says:

Undue hardship requires only a showing that the debtor will not be able to maintain a minimal standard of living now and in the future if forced to repay her student loans. We will presume that the debtor’s income will increase to a point where she can make payments and maintain a minimal standard of living; however, the debtor may rebut that presumption with “additional circumstances” indicating that her income cannot reasonably be expected to increase and that her inability to make payments will likely persist throughout a substantial portion of the loan’s repayment period.

Bankruptcy courts may look to the unexhaustive list of “additional circumstances” provided by the BAP in its published decision. See Nys, 308 B.R. at 446-47. The factors a court may consider include, but are not limited to:

[(1)] Serious mental or physical disability of the debtor or the debtor’s dependents which prevents employment or advancement;

[(2)] The debtor’s obligations to care for dependents;

[(3)] Lack of, or severely limited education;

[(4)] Poor quality of education;

[(5)] Lack of usable or marketable job skills;

[(6)] Underemployment;

[(7)] Maximized income potential in the chosen educational field, and no other more lucrative job skills;

[(8)] Limited number of years remaining in [the debtor’s] work life to allow payment of the loan;

[(9)] Age or other factors that prevent retraining or relocation as a means for payment of the loan;

[(10)] Lack of assets, whether or not exempt, which could be used to pay the loan;

[(11)] Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor’s assets and/or likely increases in the debtor’s income; [(12)] Lack of better financial options elsewhere.

If you want to find the Appeal it is Court of Appeals 446 F.3d 938 (9th Cir. 2006) Docket #: 04-16007 Nys, et al v. Educational Credit.

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This case began when Debtor-Appellee Lorna Kaye Nys (“Nys”) filed an adversary complaint in bankruptcy court to have her student loans discharged under 11 U.S.C. § 523(a)(8). The trial court found from the evidence that Nys’s current income is “not nearly enough to pay off her student loans,” and that it “is the most she can reasonably be expected to earn in the foreseeable future.” The bankruptcy court nonetheless ruled against Nys, concluding that “undue hardship” requires the showing of an “exceptional circumstance” beyond the mere inability to pay.

The original Adversary Proceeding Nys filed resulted in the bankruptcy court at that time saying, “During the trial, Nys argued that she is still unable to make payments on her student loans, and that because of additional circumstances, her inability to pay will continue into the foreseeable future. Her “additional circumstances” were that (1) she is 51 years old (14 years from legal retirement age), (2) she has “maxed out” in *943 her career and her income is as high as it is ever going to be, (3) her house is in need of substantial repairs, and (4) she commutes daily at some distance in an old automobile with high mileage that will soon need to be replaced.

The bankruptcy court ruled for ECMC, finding that Nys had not proved “undue hardship.” Although it concluded that “Nys is clearly incapable of repaying more than a portion of her student loans and this situation will almost certainly persist for the foreseeable future,” it found no undue hardship because “[Nys] ha[d] demonstrated no additional circumstances beyond the mere inability to pay.” The bankruptcy court rejected Nys’s argument that “undue hardship exists any time the debtor cannot afford to pay the loans now or in the foreseeable future.”

The Ninth Circuit of the United States Court of Appeals disagreed with the lower court rulings.

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