Recent Student Loan Developments in Bankruptcy Law Offer Hope

April 1, 2021

Student loans are a hot topic in the United States, both politically and within the everyday lives of Americans. Indeed, for millions of Americans, student loan debt is a crippling problem with seemingly no feasible solution. Recently, however, Bankruptcy Courts have displayed a proclivity to grant discharges for certain student loans debts and debtors, potentially offering those suffering from crippling student loans a way out.
As a general rule, student loans are viewed as non-dischargeable in a Chapter 7 or Chapter 13 bankruptcy; meaning, they generally cannot be “wiped” away pursuant to an individual bankruptcy proceeding. Nonetheless, the Code also provides certain exceptions and/or qualifications under which a Debtor may be exempted from the non-dischargeability mandates of the Bankruptcy Code or under which a loan used for tuition will not be considered non-dischargeable. In the recent years, Bankruptcy Courts have displayed a willingness to interpret these provisions more liberally; meaning, debtor friendly.
For example, one exception to the general rule of non-dischargeability is that student loan debt may be dischargeable where the debt “would impose an undue hardship on the debtor and the debtor’s independents.” 11 U.S.C. § 523(a)(8). Traditionally, Courts have been reluctant to find an undue hardship; indeed, the burden is on the debtor to prove an undue hardship and it is a “rigorous” one. Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009). However, in a recent case, the United States Bankruptcy Court for the Southern District of California held that a medical school graduate was entitled to discharge $432,173.99 of his outstanding student loan debt on the basis of undue hardship. Koeut v. United States (In re Koeut), 622 B.R. at 72 (Bankr. S.D. Cal. 2020). In Koeut, the debtor attended medical school financed by student loans but was unable to find a residency position, leading to a decade of severe underemployment and a bleak financial future. The Bankruptcy Court, in granting the discharge of his student loans, recognized that the debtor had given his best efforts to maximize his earning potential; that the debt crippled his credit score and hindered employment opportunities; and that the debtor’s maximum future salary was insufficient to make more than minimal payments on his loans. Thus, the student loans caused an undue hardship upon the debtor.
Similarly, the Bankruptcy Court for the District of Nebraska also recently concluded an undue hardship existed where the debtor was 50 years old with approximately $89,525.38 in federally guaranteed student loans. Specifically, the Bankruptcy Court found an undue hardship where the debtor lacked the financial resources to repay the loans despite working 53 hours per week; exercised a standard of living that was minimal with expenses that were necessary, reasonable, and non-frivolous; was responsible for a dependent, autistic grandson who required additional resources; held no savings, significant assets, or retirement funds; and made a good faith effort to maximize her income. See Mudd v United States (In re Mudd), 2020 Bankr. LEXIS 3439 (Bankr. D. Neb. 2020).
In addition, Courts have recently displayed a willingness to narrowly interpret the types of loans that fall under the non-dischargeability provision, meaning that loans that were traditionally interpreted as non-dischargeable student loans may, in fact, be subject to discharge. For example, in the past few years, Court have held that debtors may discharge private tuition answer loans; private for-profit loans issued by a student loan lender without conditions on its use; and loans for bar examination preparation studies. See McDaniel v. Navient Sols., KKC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020); Crocker v Navient Solutions, L.L.C., No. 18-20254 (5th Cir., 2019); Nypaver v Nypaver, 581 B.R. 431 (Bankr. W.D. Pa., 2018); Dufrane v Navient Solutions, Inc., 566 B.R. 28 (Bankr. C.D. Cal., 2017); and Essangui v SLF v-2015 Trust, 573 B.R. 614 (Bankr. D. MD., 2017).
Thus, the Bankruptcy Code, which was once viewed as a brick wall to any student loan relief, may actually afford certain student loan debtors relief from their crippling student loan debt. If you believe you may qualify for student loan relief under the Bankruptcy Code, please to not hesitate to contact one of our experienced bankruptcy attorneys for a free consultation today.