Student Loan May Be “Special Circumstance” under Section 707(b)(2)(B)(i)

Posted by NCBRC - October 2, 2013

In a fact-specific analysis, the court in In re Bradley found that the debtors’ nondischargeable student loan debt constituted a “special circumstance” that could be used to adjust current monthly income to rebut the presumption of abuse otherwise created by the means test calculation under section 707(b). 2013 WL 4663125 (Bankr. S.D. Ala. Aug. 30, 2013). The facts showed that the debtors lived modestly, with expenses lower that the IRS standards, and that their largest unsecured debt was their combined nondischargeable student loan of $114,792.00. The monthly payments owed on this debt exceeded the debtors’ monthly disposable income.

Under section 707(b)(2)(B)(i) a debtor may rebut a presumption of abuse by showing “special circumstances” such as a serious medical condition or military duty. Courts are split on the question of whether “special circumstances” may extend to student loan debt. See, e.g., In re Knight, 370 B.R. 429, 437 (Bankr. N.D. Ga. 2007) (student loans may constitute special circumstance); In re Siler, 426 B.R. 167 (Bankr. W.D. N.C. 2010) (student loans generally do not qualify as special circumstance). The court looked to legislative history for guidance and found that Congress had rejected the more onerous burden of showing “extraordinary circumstances.” S.REP. No. 106-49, at 7 (1999). “[T]he Committee’s retreat from the term ‘extraordinary’ suggests that there may be seemingly ‘ordinary’ expenses that are ‘special’ in the context of a bankruptcy filing.”

The court was further persuaded by the reasoning in the case of In re Sanders, 454 B.R. 855, 858 (Bankr. M.D. Ala. 2011), where that court found that forcing debtors to incur deeper student loan debt by deferring or lengthening their loans was unreasonable, and that, given the public policy in favor of higher education, student loans serve an important societal function. Based on these considerations, the Sanders court treated student loans as a special circumstance that could overcome the presumption of abuse. Compare, In re Edwards, 2012 WL 3042233 (Bankr. N.D. Ala.) (finding that although student loan debt could rebut presumption of abuse the facts of that case did not warrant such finding). The Bradley court agreed that, where supported by the facts, student loan debt could establish the special circumstances necessary to rebut a presumption of abuse. It found that the debtors had made a good faith effort to live within their means and the student loan debt still exceeded their ability to pay. For that reason, the loan debt was a special circumstance under section 707(b)(2)(B)(i) and the court denied the trustee’s motion to dismiss.

Bradley opinion

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