Half Million Dollars of Federal Student Loans Discharged in Bankruptcy

So many people continue to assume student loan debt can’t be discharged in bankruptcy. Even bankruptcy attorneys perpetuate this myth as well. In previous articles, that you can find here, I’ve shown specific examples of both federal and private students loans discharged. I’ve even pointed out broad niches of student loan debt not protected by bankruptcy, in this article.

But today I wanted to look at an assortment of cases in the past year or so where student loan debt was successfully discharged in a consumer bankruptcy action. These cases required a more advanced approach to deal with the debt, the filing of an Adversary Proceeding. Those attorneys that took on the challenge deserve a big hat tip for the investment of their time and effort. They are blazing a path others may follow.

Here is the first case to look at.

AP 14-01059 – Casey

On December 22, 2014 the Chief Bankruptcy Judge ordered that $500,000 of federal student loans owed to the United States Department of Education were discharged in the chapter 7 bankruptcy filed. The Department of Education is appealing the ruling.

According to the memorandum of Chief Bankruptcy Judge Alan Jaroslovsky, who ruled the loans were dischargeable, the Plaintiff, Casey, had fallen on hard times.

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“A few years ago, Chapter 7 debtor and plaintiff Casey was married, had a nice home and a well-paying job in the telecommunications industry. He is now divorced. His home has been sold as a short sale. He was laid off from his job and his unemployment benefits have expired. He is 63 years old, residing in a modest apartment. He is living off a very small pension, meager retirement savings, social security benefits, part time work and food stamps. He is unable to afford health insurance, and his support obligations to his former spouse have been reduced due to his inability to pay. By this adversary proceeding, he seeks discharge pursuant to § 523(a)(8a) of the Bankruptcy Code of about $500,000 in student loans he incurred to pay for the education of his three children.

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Student loans are dischargeable pursuant to § 523(a)(8) if the debtor makes a three-pronged showing: that the debtor cannot maintain a minimal standard of living if forced to repay the loans, that additional circumstances make this state of affairs likely to persist for a significant portion of the repayment period, and that the debtor has made a good faith effort to repay the loans. In re Pena, 155 F.3d 1108, 1111 (9th Cir. 1998).

It is far more likely than not that Casey’s situation will never improve to the point that he can pay any of the loans. His work experience is in a highly volatile industry and his age makes it unlikely that he can again land a high-paying job. Even if he were to land a decent-paying job, which is also unlikely, health insurance and support obligations would be items of higher priority. Underemployment, age and the limited number of years in remaining in the Casey’s work life are factors which compel the court to the conclusion that Casey’s inability to pay the loans will persist for the rest of his life.

The debtor’s testimony appeared truthful and described a situation neither unusual nor contrived. Nor did it appear that he continued to apply for loans once he lost his job, or that he believed his future was a bleak as it turned out to be when the final loan funds were being disbursed. The undisputed evidence before the court was that Casey has tried diligently and unsuccessfully to find a new job and that he has been forced by circumstance to live frugally. Accordingly, the court finds that Casey has acted in good faith.”

The lawyer in this case was:

Thomas P. Kelly III, SBN 230699
50 Old Courthouse Square, Suite 609
Santa Rosa, California, 95404-4926
Telephone : 707-545-8700
Facsimile : 707-542-3371
Email : tomkelly@sonic.net

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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