Student Loans

In two recent student loan cases out of the First Circuit, the bankruptcy courts rejected Brunner and, instead, applied a totality-of-circumstances test to grant discharge under section 523(a)(8). Smith v. U.S. Dept. of Ed., No. 16-10998, Adv. Proc. No. 16-1079 (Bankr. D. Mass. April 4, 2018); Erkson v. U.S. Dept. of Ed., No. 16-20169, Adv. Proc. No. 16-2018 (Bankr. D. Me. April 3, 2018). [Read more…] about Student Loans Discharged under Totality-of-Circumstances Test

A guarantor on a student loan is an “accommodation party” who comes within the purview of the student loan nondischargeability provision when she is required to pay the loan on behalf of the debtor. De la Rosa v. Kelly (In re Kelly), No. 17-32295, Adv. Proc. No. 17-3320 (Bankr. S.D. Tex. March 23, 2018).

Mary De la Rosa was the guarantor on a student loan acquired by her friend and fellow church member, Tabitha Kelly. When Ms. Kelly defaulted on the loan, the lender sued Ms. De la Rosa, and she paid the debt pursuant to a state court judgment. Ms. Kelly and her husband later filed for Chapter 13 bankruptcy, and Ms. De la Rosa filed an adversary complaint seeking to have the debt deemed nondischargeable under section 523(a)(8)(A)(ii). [Read more…] about Guarantor May Contest Dischargeability of Student Loan

Willie West was 60 years old, had been largely unemployed for thirty years, and owed over $60,000 in student loans. He lived rent-free with his aunt and received $197.00 under the Supplemental Nutrition Assistance Program. When he sought to discharge the loans in bankruptcy, the case came before the court on the parties’ cross-motions for summary judgment. West v. U. S. Dept. of Ed., No. 17-20506, AP No. 17-78 (Bankr. W.D. Tenn. Feb. 4, 2018). [Read more…] about Brunner Test Does Not Require that Debtor Take Advantage of IBR

The district court reassessed the evidence presented at the adversary hearing and overturned the discharge of the debtor’s student loan debt. DeVos v. Price (In re Price), No. 17-3064 (E.D. Pa. Jan. 24, 2018). Chapter 7 debtor, Kristin M. Price, was a mother of three pre-school children, separated from her husband, and employed part-time as a vascular sonographer. She sought to discharge her almost $26,000.00 federal student loan. The bankruptcy court applied the three-part Brunner test, specifically finding that Ms. Price’s financial distress was likely to persist for at least five of the seven years remaining on her loan contract. Because this constituted a “significant portion of the repayment period,” the court granted discharge under section 523(a)(8). [Read more…] about District Court Reassesses Evidence of Undue Hardship

The court could not confirm the debtor’s plan proposing to pay all claims in full except her student loan debt, for which she proposed payments on interest only outside the plan. In re Ryan, 17-1507 (Bankr. M.D. Fla. Nov. 7, 2017).

Jenna Ryan’s Chapter 13 petition schedules listed total debts of approximately $173,000, including a student loan debt from the Department of Education of almost $80,000. Her disposable income was $4,417.72. Her plan proposed to pay $1,403.09 per month for sixty months to pay off all debts in full except for the student loan debt. As to that claim, the plan proposed that Ms. Ryan would maintain payments outside the plan. She took the “position that there are no payments due under the terms of the student loan, given the filing of the bankruptcy, so her payments are voluntary and enough to cover the accruing interest payments.” [Read more…] about Debtor’s Treatment of Student Loan Outside Plan Not Confirmable

A loan that is not itself an “educational benefit” does not fall under section 523(a)(8)(A)(ii)’s exception to discharge as an “obligation to repay funds received.” Essangui v. SLF V-2015 Trust, No. 16-12984, Adv. Proc. No. 16-201 (Bankr. Md. Oct. 2, 2017).

Chapter 7 debtor, Yolande Essangui, enrolled in a Medical Education Readiness Program (MERP, or Program) in preparation for entering Ross University School of Medicine. Because MERP was not a Title IV institution, students were not eligible to receive federal student loans to attend the Program. Ms. Essangui financed her attendance in MERP with the private loan at issue, which, by the time of her bankruptcy, totaled $37,175.25. She used the money to pay tuition, buy books and pay for housing and other expenses during her schooling. Ms. Essangui completed the Program and enrolled in Ross University, but never graduated.

As it was undisputed that the loan was not an “educational benefit overpayment or loan” under section 523(a)(8)(A)(i), or a “qualified education loan” under section 523(a)(8)(B), the issue was whether the debt was “an obligation to repay funds received as an educational benefit, scholarship, or stipend,” under section 523(a)(8)(A)(ii).

After a walk through the history of student loan treatment in bankruptcy, the court arrived at the relevant language in BAPCPA, which it found was intended to “enhance fairness” to both creditors and debtors. Citing Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 635 (B.A.P. 9th Cir. 2015), the court adhered to the minority position that Congress’s separation, in 2005, of “an educational benefit overpayment or loan” in paragraph (A)(i) and “funds received” in paragraph (A)(ii) indicates that Congress did not intend the latter paragraph to cover loans.

The court rested its decision on principals of statutory interpretation in which Congress is presumed to organize statutes meaningfully and give different meanings to different words. The court found it significant that the funds received in paragraph (A)(ii) must be “as” an educational benefit rather than be “for” an educational benefit. Under this language, the funds themselves must be the educational benefit rather than be provided for the purpose of acquiring the educational benefit. Furthermore, paragraph (A)(ii) delineates three types of funds: an “educational benefit,” a scholarship and a stipend. Where scholarships and stipends typically need to be repaid only upon the debtor’s failure to complete her education, the court reasoned that Congress intended “educational benefit,” to be similarly contingent. This contingent “obligation to repay funds” is not equivalent to a “loan.”

The court further found that applying paragraph (A)(ii) to loans would render the language in paragraph (A)(i), which specifically covers government-related loans, and paragraph (B), which covers “any other educational loan that is a qualified education loan,” superfluous. Paragraph (A)(ii), if given the broad interpretation endorsed by the creditor here, would already cover those loans. The minority position also comports with the general principal of narrowly interpreting exceptions to discharge.

The court concluded that “the language of the statute suggests that Congress worked to strike a delicate balance between the fresh start policy for debtors and the protection of certain educational programs and lenders offering loans for such programs.” Where the creditor did not argue that the funds themselves were an “educational benefit,” and section 523(a)(8)(A)(ii) does not apply to loans, Ms. Essangui was entitled to summary judgment.

Essangui Bankr Md opinion Oct 2017

The Brunner undue hardship test requires examination of the unique facts and circumstances of each case, and the analysis for whether the debtor’s financial condition is likely to persist should not look beyond the life of the loan. ECMC v. Murray, No. 16-2838 (D. Kans. Sept. 22, 2017).

After an evidentiary hearing and inquiry into Alan and Catherine Murray’s expenses and income, the bankruptcy court found they could not maintain a minimal standard of living if they were required to pay off their student loans in their entirety, including interest, but that they could afford to pay off the principals.

ECMC appealed the discharge of all but the principal to the District Court. [Read more…] about Court Applies Realistic Fact-Based Analysis to Student Loan Discharge