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I believe that Federal Guarantee loans are covered by 523(a)(8)(A), while the private loans are under 523(a)(8)(B). (Make sure to confirm this out before using it as an argument.)

There is a split as to whether or not student loans are per se non-consumer debts. Rather, the Courts will look to determine how the money was spent. See In re Stewart, 175 F.3d 796 (10th Cir. 1999); cf. In re Wisher, 222 B.R. 634 (Bankr. D.Colo. 1998) [there was no testimony regarding how the student loan was used, so the Court held it was consumer debt]; In re Vianese, 192 B.R. 61 (Bankr. N.D.N.Y. 1996) [student loan for children=s education is a consumer debt]; In re Rucker, 454. B.R. 554 (Bankr. M.D. Ga. 2011). In In re Stewart, 175 F.3d 796 (10th Cir. 1999), the Tenth Circuit looked to the evidentiary record and determined that a substantial portion of student loans were used for family expenses as opposed to tuition, books or other direct educational expenses.

Can a private collection agency purportedly acting for USA Funds Inc, issue an order of withholding (without court proceedings) on a student loan debt? USA Funds is a guarantor on the student loan debt.  Congress gave guaranty agencies the authority to administratively issue orders to defaulted borrowers’ employers requiring them to withhold up to fifteen percent (15%) of the borrower’s disposable income.  See 20 U.S.C. § 1095a.  This section explicitly preempts state laws and sets forth procedures for providing students with due process, including prior notice of the agency’s intent to withhold, a hearing if requested, and the issuance of a Withholding Order.  See 20 U.S.C. § 1095a(a), (b); 34 C.F.R. § 682.410(b)(9).  This section also provides that guaranty agencies may sue employers who do not deduct and pay over as directed in the Withholding Order. See 20 U.S.C. § 1095(a)(6); 34 C.F.R. § 682.410(b)(9)(i)(F).

All Private Student Loans Are Not Excepted from Discharge:

In re Homaidan v Sallie Mae, Navient, 20-1981 In the United States Bankruptcy Court for the Eastern District of New York (Stong, B.J.), the borrower argued that a student loan was discharged in bankruptcy. The bankruptcy court denied the lender’s motion to dismiss after concluding that 11 U.S.C. § 523(a)(8)(A)(ii)—which excepts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend”—does not cover private student loans. We AFFIRM.

In this case, the 2d Circuit joined the 5th and 10th Circuits in holding that the discharge exception in 11 U.S.C. § 523(a)(8)(A)(ii) for “an obligation to repay funds received as an educational benefit, scholarship, or stipend” doesn’t cover private student loans, only things like conditional grants (e.g., a ROTC grant that has to be repaid if the student doesn’t enlist).

It’s another important student loan decision. At this point ever circuit to weigh in on the issue has said that private student loans aren’t covered under 523(a)(8)(A)(ii).  Instead, a private student loan, if it’s going to be non-dischargeable, would have to fit under 523(a)(8)(B), but that provision doesn’t cover all private student loans. It only covers “qualified educational loans,” which are loans solely for qualified higher education expenses (itself a defined term).

According to Adam Levitin, posting an article in of Credit Slips: It’s not clear to me what percentage of existing private student loans do not qualify as “qualified educational loans,” but this decision might be quite problematic for many of those loans, particularly if disbursement went solely to the student and the loan did not require the proceeds to be used solely for qualified educational expenses. Those loans might be dischargeable, but remember that they are unlikely to be the entirety of a debtor’s student loan debt. Federal student loans will remain non-dischargeable. That might complicate the calculation for some borrowers of whether it’s worthwhile filing for bankruptcy to try to discharge the private student loan debt. I would expect an uptick in filings seeking a discharge, especially in the 2nd Circuit, but I wouldn’t expect a sudden stampede of debtors. As word of mouth gets around, however, I think we’ll see more interest in bankruptcy as a partial solution to student loan debt.

Dischargeability of Private Student Loans

Navient Solutions LLC v. Crocker (In re Crocker), 18-20254 (5th Cir. Oct. 21, 2019) The lender argued that the private student loans were “an obligation to repay funds received as an educational benefit, scholarship, or stipend” under Section 523(a)(8)(A)(ii). Judge Southwick noted the conspicuous absence of the word “loan” in that subsection when it is included in other subjections defining nondischargeable student loans.

The words “benefit, scholarship, or stipend,” he said, imply money that was granted, not loaned, Judge Southwick said. If those words subsumed all student loans, then the other subsections in (a)(8) would be surplusage, he said.

The lender cited cases holding that any funds received for an educational purpose, including private loans, are nondischargeable. The lender conceded, however, that there has been increasing caselaw since 2015 holding that private student loans are dischargeable. No circuit has ruled on the subject in a precedential holding, Judge Southwick said.

Judge Southwick affirmed the ruling that private student loans are dischargeable. The notion that the 2005 amendments made all student loans nondischargeable, he said, “is not only unsupported by the text, it is unsupported by some of [the lender’s] authorities.”  Judge Southwick went on to say that Section 523(a)(8)(A)(ii) results in the nondischargeability of “educational payments that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions of the payments.”

Institute of Imaginal Studies v. Christoff (In re Christoff)   9th Cir. BAP No. NC-14-1336-PaJuTa (3/27/15)  Debtor did not receive funds from for-profit school, instead received tuition credit.  In BAPCPA Congress made the changes to § 523(a)(8) by setting off the “obligation to repay funds received” language from the other provisions of § 523(a)(8) in a new subsection §523(a)(8)(A)(ii). We agree with the bankruptcy court, that in restructuring the discharge exception in this fashion, Congress created “a separate category delinked from the phrases ‘educational benefit or loan’ in § 523(a)(8)(A)(i) and ‘any other educational loan’ in § 523(a)(8)(B).” In re Christoff, 510 B.R. at 882. Put another way, “new” § 523(a)(8)(A)(ii), now standing alone, excepts from discharge only those debts that arise from “an obligation to repay funds (emphasis added) received as an educational benefit,” and must therefore be read as a separate exception to discharge as compared to that provided in § 523(a)(8)(A)(i) for a debt for an “educational overpayment or loan” made by a governmental unit or nonprofit institution or, in § 523(a)(8)(B), for a “qualified education loan.”Simply put, because Debtor did not actually receive any funds, Meridian’s debt is not excepted from discharge under § 523(a)(8)(A)(ii).

In McKay v. Ingleson, 558 F.3d 888, 889 (9th Cir. 2009), (deferred payment of the debtor’s tuition and costs of other “educational services”. A late fee would be assessed if default in payments. McKay filed for bankruptcy relief; University sued in state court to recover debt. McKay filed an adversary claiming violation of the discharge injunction of § 524(a). Bankruptcy court and district court concluded no violation of the discharge injunction because debt excepted from discharge under § 523(a)(8). The Ninth Circuit affirmed, reasoning that the agreement between the parties was a nondischargeable “loan” under § 523(a)(8), and that it did not matter that no actual money had changed hands between the parties under their arrangement. Id. at 890. In explaining its decision, the court cited to In re Johnson, 218 B.R. 449 (8th Cir. BAP 1998). The court also cited to the BAP’s opinion in In re Hawkins for the proposition that the amount of the loan must be based on the amount of benefit the debtor received; the court concluded that the “loan” in McKay complied with that requirement. Id. at 891. (note – pre-BAPCPA)

Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 753- 55 (Bankr. S.D.N.Y. 1985), The district court had thoroughly analyzed the limited legislative history pertaining to the “undue hardship” requirement.

Nitcher v ECMC, National Collegiate Student Loan, 18-03090 (Bankr.D.Ore.Aug 23, 2019) Debtor is a 38-year-old, single attorney with no dependents or serious medical issue. She is well educated, has marketable job skills, is fully employed and is 10 years into her legal career. Debtor’s gross income has increased incrementally since 2008; her gross earnings for 2018 was $69,398.00. She has no nonexempt assets, real estate or retirement plans or benefits. The Court found that Debtor satisfied the requirements of the Brunner test even though she did not fit the standard profile of one who is unable to maintain a minimal standard of living while repaying her student loans. In reaching that conclusion, the Court considered, inter alia, Debtor’s Amended Schedule J with ECMC’s REPAYE student loan payment resulting in negative monthly net income of ($474); NC’s loans are private student loans; NC did not offer an income-driven repayment program or affordable repayment option; the loans had matured or been accelerated leaving Debtor subject to garnishment; Debtor had made efforts to maximize her income; and, Debtor had made payments on her student loans for approximately eleven years before filing bankruptcy.

The Court concluded that, although Debtor satisfied all three prongs of the Brunner test and cannot afford to repay the student loans in full, she can afford to repay a portion ($16,500) of the loans ($51,800).

Hedlund v. The Educational Resources (No. 12-35258, D.C. No. 6:11-cv-6281- AA)(9th Cir, 3-2013) Partial discharge of student loans.   Underemployed, attempts to pay loans.  The bankruptcy court did not err in granting a partial discharge of the debtor’s student loans under 11 U.S.C. section 523(a)(8), and the district court’s judgment holding otherwise is reversed and remanded, where: 1) the district court erred by reviewing the bankruptcy court’s good faith finding de novo, rather than for clear error; and 2) the bankruptcy court’s finding of good faith was not clearly erroneous.

Educ. Credit Mgmt. Corp. v. Mason (09/28/06 – No. 04-35999) (9th Cir.Ct.App) Partial discharge of government-insured student loans is reversed where the debtor had not made a good effort to pay back the loans since he had not maximized his income or made adequate efforts to obtain full-time employment.

Educ. Credit Mgmt. Corp. v. Nys, No. 04-16007 (9th Cir. April 26, 2006) A bankruptcy panel’s reversal of a ruling against a creditor on her adversary complaint in bankruptcy court to have her student loans discharged is affirmed where the bankruptcy court erred in requiring the debtor to show exceptional circumstances beyond the inability to pay in the present and a likely inability to pay in the future.  “Has the Debtor shown that her inability to pay will likely persist throughout a substantial portion of her loans’ repayment period?”  [(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.

Saxman v. Educ. Credit Mgmt. Corp., No. 01-35620 (9th Cir. April 14, 2003)  Bankruptcy courts may partially discharge an educational loan pursuant to their equitable authority under 11 U.S.C. section 105(a).

Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 753- 55 (Bankr. S.D.N.Y. 1985), The district court had thoroughly analyzed the limited legislative history pertaining to the “undue hardship” requirement. “The harsh results that often are associated with Brunner are actually the result of cases interpreting Brunner.  Over the past 32 years, many cases have pinned on Brunner punitive standards that are not contained therein. See Briscoe v. Bank of N.Y. (In re Briscoe), 16 B.R. 128, 131 (Bankr. S.D.N.Y. 1981) (coining the infamous and oft-repeated term “certainty of hopelessness” but not applying the Brunner test, which was established six years later); see also Jean-Baptiste v. Educ. Credit Mgmt. Corp. (In re Jean-Baptiste), 2018 WL 1267944, *10 (Bankr. E.D.N.Y Feb. 23, 2018) (requiring proof of a “certainty of hopelessness” despite the plain and straightforward language of Brunner). Those retributive dicta were then applied and reapplied so frequently in the context of Brunner that they have subsumed the actual language of the Brunner test. They have become a quasi-standard of mythic proportions so much so that most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans.” 

NOTE: However the decision does not over rule Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir.1987).  The difficult challenges to student discharge in bankruptcy remain.  Brunner is applicable in the Ninth Circuit under United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1111–12 (9th Cir.1998).

In re Rosenberg, 18-35379 (S.D. NY 12/19) The New York Bankruptcy Court ruled that the Brunner Test is being misapplied in Student Loan cases and discharged $220,000 for a lawyer with annual income of $37,500.  The Court found that other Courts are applying Brunner too harshly or punitively.

In re Martin, 16-9052 (Bankr. N.D. Iowa Feb. 16, 2018) The 50 year old debtor earned her bachelor’s degree, J.D. and master’s of public administration from the University of South Dakota between 1989 and 1993. For three years after her admission to the bar, she held a job as a lawyer with a nonprofit organization until budget cuts ended her employment. She was unemployed for the next five years, followed by eight years of employment in a non-legal job. After that job ended, she had been unemployed for the last 10 years.  Judge Collins said that the debtor was entitled to discharge the student loans under Section 523(a)(8) because she had shown undue hardship, made good faith efforts to repay, made payments when she was able, applied for deferments when she was not, and incurred reasonable living expenses, husband was 66 and the primary support.  NOTE: The 8th Circuit does not permit partial discharges (like the 9th Cir) so the judge was left to an all or nothing choice.

In Krieger v. Educ. Credit Mgmt. Corp., 2013 U.S. App. LEXIS 7202 (7th Cir. Apr. 10, 2013), the court of appeals examined the facts and circumstances related to a $25,000 student loan obligation owed by Ms. Krieger, a 53-year-old woman, and concluded that the bankruptcy court did not err when it determined that Krieger qualified for a hardship discharge of her student loan.In arriving at its conclusion, the court of appeals explained that Ms. Krieger “is essentially out of the money economy and living a rural, subsistence life[,]” and her circumstances were unlikely to change at any point in the future.

Article from American Bankruptcy Law Journal re Student Loans Scandal and Hardship Discharge

In re Justice, 4:12-bk-12028-BMW (Dist of Arizona, 7/30/13) Decision details all the Brunner issues and steps through each element.  Finds Debtor’s student loan to be discharge in its entirety.

In re Sanborn, (Bkrtcy.D.Mass.) July 11, 2010: Discharge – Single mother suffering from chronic fatigue syndrome was not entitled to “undue hardship” discharge of student loans. Neither a Chapter 7 debtor’s medically diagnosed chronic fatigue syndrome/myalgic encephalomyelitis (CFS/ME), which at present prevented her from working and limited her to monthly income of $1,211 in public assistance benefits, nor the fact that she was a single mother charged with the care of a young child entitled the debtor to an “undue hardship” discharge of her $27,674 in student loan debt. Even the debtor’s treating physician acknowledged that the debtor’s present inability to work would wax and wane, and might perhaps be controlled through the use of drugs that the debtor had declined to take out of concern for the possible side effects. The debtor had obtained a certificate in medical assistance, that qualified her for lucrative employment in a variety of medical settings, and her child would not need as much care as he grew older. Finally, repayment options, such as the income contingent repayment plan (ICRP), provided the debtor with the flexibility needed to deal with what would likely be her changing financial circumstance.

In the Matter of: Coleman, No. 06-16477 U.S. 9th Circuit Court of Appeals, August 01, 2008  “[U]ndue hardship” determinations, whereby bankruptcy courts decide whether student loans qualify for discharge, can be ripe in a Chapter 13 case substantially in advance of plan completion. Since graduating from college, Coleman has been irregularly employed as a substitute teacher and art teacher, and was recently laid off in March of 2005. Just under a year after the plan was confirmed, Coleman sought a determination that it would constitute an undue hardship under 11 U.S.C. § 523(a)(8) for her to repay her student loans, and that her student loans should therefore not be excepted from discharge. Educational Credit moved to dismiss for lack of subject matter jurisdiction on ripeness grounds. The bankruptcy court denied the motion, In re Coleman, 333 B.R. 841 (Bankr. N.D. Cal. 2005), and the district court affirmed the decision of the bankruptcy court.  We affirm.

Did you know it’s possible to get a student loan disability discharge by just applying for it? It apparently has to be a total disability. The phone number is 888-303-7818.  If you Google that number many website links pop up with further information and the application form.

NOTE – unless you are insolvent this discharge may result in taxable income.  Talk to a CPA for tax advice.

In McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug. 31, 2020), the Tenth Circuit held that an educational loan does not constitute “an obligation to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii) of the Bankruptcy Code.

Section 523(a)(8) of the Code provides, in pertinent part:

  1. A discharge under this title does not discharge an individual debtor from any debt —

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for —

(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or

(B) any other education loan that is a qualified education loan, as defined in section 221(d)(1) of the [IRS Code], incurred by a debtor who is an individual.

In McDaniel, the debtors borrowed over $100,000 in private loans for college living expenses. These loans were not qualified education loans, nor were they made or guaranteed by a governmental unit or nonprofit institution. Whether the loans were dischargeable, then, was left to the Tenth Circuit’s interpretation of § 523(a)(8)(A)(ii).  The Court provides a lengthy analysis of canons of statutory interpretations to interpret § 523(a)(8)(A)(ii)and ultimately finds that the statutory terms “obligation to repay funds received as an educational benefit” and “educational loan” mean separate things. The Tenth Circuit explained: “It is clear to us that when § 523(a)(8) refers to an “educational benefit,” just like when normal speakers of English refer to things like a health benefit, unemployment benefit, or retirement benefit, it is using a definition of “benefit” that implies a “payment,” “gift,” or “service” that ordinarily does not need to be repaid.”

The Court concluded that Congress did not intend § 523(a)(8)(A)(ii) to cover loans. Finding otherwise “would violate the canon against surplusage because then there would be no need for a separate provision excepting from discharge specific categories of student loans.”  Clip from Michael Best’s Client Alert, 10/7/20

Crocker v. Navient Solutions, LLC  No. 18-20254 (5th Cir. 10/22/2019) Two debtors obtained student loans, one to prepare for his bar exam, and the other to fund tuition and expenses to attend a vocational school, from a “for-profit, public corporation whose loans are not part of any governmental loan program.” The loans were then transferred to a loan servicing company. Both debtors filed for Chapter 7 bankruptcy, one in Texas and the other in Virginia. Both listed the loans on their schedules and neither disputed the debt. Both received general discharges. After the discharges, the loan servicer made telephone calls and sent e-mails demanding repayment.

Court examined the language of 11 U.S.C. § 523(a), which excepts from discharge certain educational loans “unless excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor’s dependents[.]” It then discussed “some of the prior statutory language that the current statute has replaced or supplemented” before concluding that “[t]he loans at issue here, though obtained in order to pay expenses of education, do not qualify as ‘an obligation to repay funds received as an educational benefit, scholarship, or stipend’ [under subsection 523(a)(8)(A)(ii)] because their repayment was unconditional. They therefore are dischargeable.”

In re Kashikar (Kashikar v. Turnstile Capital Mgmt. LLC), 567 B.R. 160, 166-67 (B.A.P. 9th Cir. 2017). not qualified education loans (foreign medical school education not transferrable to US medical school).  Determined to be dischargeable (523 did not apply).  Burden on lender to support debt fits under 523 perimeters. The BAP rejected the expansive reading of “educational benefit” adopted by the bankruptcy court, reasoning that if Congress had intended § 523 (a) (8) (A) (ii) to read “loans received as an educational benefit,” it could have drafted as such. As Congress had not done so, the BAP concluded that in organizing § 523 (a) (8) as it did, Congress intended the subsections to serve different purposes and apply to particular types of debts. The BAP cautioned that § 523 (a) (8) (A) (ii) is not a “catch-all” provision that includes any type of credit transaction that happens to confer an educational benefit on a debtor.  Therefore, the BAP reversed the bankruptcy court’s holding

In re Chambers (11/04/03 – No. 03-1557) (7th Cir) In a Chapter 7 declaratory judgment action, summary judgment to plaintiff is affirmed where plaintiff’s unpaid balance on a student account does not meet the definition of an educational loan under section 523(a)(8) and was therefore properly discharged.  “Accordingly, applying this standard, the bankruptcy court found no evidence of intent by either party to enter into a loan arrangement; rather, the debt arose from Ms. Chambers’ failure to pay the tuition and expenses when due.”

Interest on student loans:

Interest continues to accrue on all nondischargeable debt while the bankruptcy is pending because interest is viewed as an integral component of the debt.  Because of that, I don’t believe that interest can be modified.Case citations: The Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals has held that post-petition interest on a nondischargeable student loan is likewise nondischargeable under the Bankruptcy Code. In re Pardee, 218 B.R. 916, 918 (9th Cir. BAP 1998), citing Bruning v. United States, 376 U.S. 358, 84 S. Ct. 906 (1964) (held that “logic and reason” require that post-petition interest on a nondischargeable tax claim is also nondischargeable). This is because “Congress has determined that absent proven undue hardship, student loans are nondischargeable and, thus, pass unaffected through the bankruptcy estate for purposes of the debtor’s liability . . . .” In re Kielisch, 258 F.3d 315, 320-321 (4th Cir. 2001) (emphasis added); see also In re Cousins, 209 F.3d 38, 40 (1st Cir. 2000) (student loans “pass or ride through the bankruptcy unaffected”).

Collection costs:

Collection costs, like interest, are also an integral part of a nondischargeable student loan debt. See In re Featherston, 238 B.R. 377, 381 (Bankr. S.D. Ohio 1999) (“reasonable collection costs fall under the exception to discharge for student loan obligations”); see also In re Pantelis, 229 B.R. 716, 720 (Bankr. N.D. Ohio 1998); In re Claxton, 140 B.R. 565, 570-571 (Bankr. N.D. Okla. 1992). As discussed in Featherston, “assessing collection costs to the debtor is not only authorized by statute, it is mandated” by 20 U.S.C. § 1091a. Featherston, 238 B.R. at 382.  Moreover, under 34 C.F.R. 682.410(b)(2), the collection costs must be assessed regardless of whether they are provided for within the promissory note. Id.

In re Hurley  (9th Cir BAP, filed 6/26/19), Appellant Paul Hurley appeals a summary judgment order in favor of the United States and Accesslex Institute, dba Access Group (together, “Defendants”). The bankruptcy court determined that, given Hurley’s legal background and the nature of his criminal conduct, he was unable to establish good faith under Brunner and therefore was not entitled to a hardship discharge of his student loans under § 523(a)(8).2 We AFFIRM.

On May 13, 2016, Hurley was convicted for the crimes of Receiving a Bribe by a Public Official and Receiving an Illegal Gratuity by a Public Official, both felonies. He was sentenced to thirty months’ imprisonment and three years’ supervised release. Following his conviction, Hurley was disbarred from the practice of law by order of the Washington Supreme Court. Hurley was released from prison in June 2018 and is living in a halfway house in Seattle.

There is a conflict between § 1322(b)(1) and (b)(5) which permits payment outside the plan of those debts that exceed the term of the plan.  This should apply to student loans.  But, the majority of the courts seem to state that it would impose and unfair discrimination if the plan provides that student loans are paid outside the plan.  The statutory language remains confusing at best and challenges bankruptcy judges with this extremely awkward analysis. Most court’s excuse is that Congress could provide a clearer path by explaining the interplay between §1322(b)(1) and (5) and expressly stating the conditions that allow a chapter 13 debtor to provide preferential plan treatment to student loan obligations.

In re Engen, Case No. 15-20184 (Bankruptcy Court, Dist of Kansas 12/16).  The Debtors propose a plan in which student loan creditors are paid as a separate class before other general unsecured creditors. The Court’s reference to “separate classification” includes this favorable treatment. The Court, having reviewed the pleadings and counsels’ arguments, overrules the Trustee’s objection.  Debtors’ proposed plan satisfies § 1322(b)(1) because Debtors’ separate classification and favored treatment of student loans does not discriminate unfairly, and the student loan claims are substantially similar.

In re Harding, 423 B.R. 568 (Bankr. S.D. Fla. 2010).  It does not allow different classification of the nonpriority student loan, but it issues an injunction against penalties.

United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010) (3/23/10). Supreme Court Refuses to Void Confirmation of Plan Discharging Student Loan

In that case Espinosa (9th Cir), a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan.  He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan.  Although the student loan creditor received actual notice of the plan, it did not object to the partial payment.  The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997.  Several years later, USAF attempted to collect the unpaid interest on the loan.  Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).

The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.”  The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional.  The issue then, was whether USAF received adequate notice to satisfy due process.  The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.

The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power.  Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment.  This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”

The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.

A case involving friends and family and non-dischargeable student debt from the U.S. Bankruptcy Court for the Eastern District of Michigan.

The case, Ramani v. Romo (In Re Romo), Ad. Pro. No. 17-2107-dob was recently resolved by way of summary judgment for the plaintiffs, the debtor’s former in-laws. As set forth in the May 14, 2018 opinion of Judge Daniel S. Opperman, the debtor entered her marriage to the plaintiffs’ son with considerable student debt. The U.S. Department of Education offered to forgive a significant amount of the debt in return for an immediate payment of $105,000.

student loan

The plaintiffs were able to provide the funds necessary to retire the debt and did so in 2012 by way of a scarcely documented loan which the debtor was to repay at the rate of $400 every two weeks. Over several years, the debtor repaid $21,550. Also, during that time, the debtor’s marriage to the plaintiffs’ son ended as did her twice-monthly payments to the plaintiffs. The plaintiffs sued in state court and took an $84,312 judgment against the defendant in April 2017. In July 2017, the debtor filed for relief under Chapter 7.

Importantly, as it turned out, the plaintiffs’ complaint included a detailed description of the purpose of the loan, reciting that the original debt was owed to the Department of Education and that the loan was made by way of a check from the plaintiffs, payable to the department. The complaint also described the history of payments made by the debtor and her refusal to pay the balance of the loan. The debtor did not answer the complaint and a default judgment was entered for the plaintiffs. The debtor did not appeal.

The plaintiffs filed an adversary proceeding in the bankruptcy, challenging the dischargeability of the debt owed to them. In his opinion granting summary judgment to the plaintiffs, Judge Opperman held that the debtor was collaterally estopped by the state court judgment from challenging the existence or enforceability of the loan or the plaintiffs’ assertion that the loan was for educational purposes. “While she makes excellent arguments supporting her position, the (state court judgment) answers all these questions and closes the door to her because of collateral estoppel.”

Utilizing the facts set forth in the state court complaint, Judge Opperman concluded that the loan was a “qualified education loan” as defined by 26 U.S.C. § 221(d)(1), which specifically includes loans made to refinance student debt, and therefore excepted from discharge under 11 U.S.C. §523(a)(8)(B), which exempts student loans that are neither made nor guaranteed by a governmental agency.

Finally, Judge Opperman notes that while 26 U.S.C. §221(d)(1) excludes debts owed to a “related person,” the term, as defined by 26 U.S.C. 267 (b) and (c), limits the exclusion to debts owed to one’s “brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants.” Notably excluded from the exclusion are a debtor’s former mother-in-law and father-in-law.

So, for a practitioner representing a lender seeking to collect a debt which may be non-dischargeable in the event of the defendant’s subsequent bankruptcy, it is important to allege facts in the collection action that will support a later determination of non-dischargeability.

On the other hand, for a practitioner representing a borrower with hopes of obtaining a discharge, you can’t let a creditor take a judgment in state court and only seek bankruptcy protection in response to collection activity without being stuck with the facts as established in the collection suit.

And for over-extended student loan borrowers, if you’re going to hit someone up to refinance your debt, get it from your own parents or well-to-do sister, not your in-laws.

By: Bryan Cave Leighton Paisner (Bryan Cave) – William Maloney (reprinted for educational purposes only)

Telephone Consumer Protection Act

HENDERSON V.UNITED STUDENT AID FUNDS  No.17-55373 (9th Cir Ct Appeals, 3-22-19) Revived a consumer’s claim that a nonprofit corporation involved in student loans was vicariously liable for violation of the Telephone Consumer Protection Act, because it had ratified student loan debt collectors’ illegal calling.

FINDING: The panel reversed the district court’s grant of summary judgment in favor of the defendant, the owner of the plaintiff’s student loans, and remanded for further proceedings in an action under the Telephone Consumer Protection Act. The panel held that a reasonable jury could hold the defendant vicariously liable for alleged TCPA violations by debt collectors. The defendant hired a student loan servicer, which hired the debt collectors.

The panel held that the defendant was not per se vicariously liable under FCC orders. Under federal common law, however, there were genuine issues of material fact as to whether the defendant ratified the debt collectors’ calling practices and had a principal-agent relationship with the debt collectors.


3/26/19 – Tax law changes tax brackets, deductibles, and a lot more. More notably, for certain student borrowers, it changes the tax exemption status of discharged student loans. As of January 2018, discharged student loan debt is no longer considered income. Any student loan debt that is discharged due to death or total and permanent disability (TPD) is no longer taxable.

NOTE – this is not a retroactive law. Anyone awarded TPD student loan discharge during the 2017 tax year will still have to pay taxes come April 2018.

The new law covers eligible loans discharged from January 1, 2018 to December 31, 2025. Only loans discharged during this time are tax exempt. The bill expires in 2025, but Congress can renew it if desired.


Divorce decree does not control obligation to pay student loan

In re Carrion, Jr. (U.S. Department of Education v. Carlos Carrion, Jr.) 9th Cir BAP, No. SC-18-1234-FBKu (5/31/19) Debtor remained liable for the entire amount of his own educational loan debt even though he agreed to a 50-50 division of the debt with his ex-wife in their marital settlement agreement. Bankruptcy court misapplied California law, reverse and remand.

According to a Reuters article (11/13/19) Black student loan borrowers are defaulting at nearly twice the rate of whites.

Except from the article:

Students of color often need to borrow more money to pay for college because their families have less wealth to draw on to help cover those costs, according to a report released in September by the Center for Responsible Lending.

Those higher debt loads help to perpetuate the racial wealth gap. For instance, black and Hispanic workers tend to be paid less than their white peers. Those smaller paychecks, combined with the larger debt loads, make it harder for students of color to buy homes or make other investments that could help them accumulate wealth.

“How do we ever get out of this cycle?” Ashley Harrington, senior policy counsel for the Center for Responsible Lending, told Reuters in an interview on Wednesday. “In order to get more opportunity, you need to go to college but you need more debt to make that happen. At the same time, incomes have not kept up”

Bukovics v. Navient (In re Bukovics), 17-00186 (Bankr. N.D. Ill. Feb. 25, 2020)  In 1990, the debtor had about $21,000 in student loans. She paid about $30,000.  Over time there was periods of unemployment and low income, she applied for and sometimes received deferments. Years later she still owed $73,000.  She filed a chapter 7 petition and discharged about $145,000 in debt, not including student loans.  An adversary by filed in order to discharge student loans (debtor represented by pro-bono attorney).  Judge Schmetterer said that “debtors face an uphill battle for relief from their student loans through the difficult-to-meet Brunner test to determine ‘undue hardship’” under Section 523(a)(8). Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987).  He went on to say that “the Brunner test does not require the debtor to live a life of poverty to pay back his or her student loans.” He also noted how the Seventh Circuit had backed off from the “certainty of hopelessness” standard.

According to the judgment “it wasn’t even a close case”. He said that the debtor’s “current situation, quite frankly, is nowhere near sufficient to meet a minimum standard of living.” He said the lender was “pointing to pennies that may be saved when much more is needed for [the debtor] to maintain a minimum standard of living.”

Below is a journal article with a good analysis of the meaning of “educational benefit” for determination of dischargeability (starting at page 292).  In addition, there are two leading cases from the 9th Circuit BAP (2015 and 2017) that rule along the same lines as McDaniel v. Navient Solutions from the 10th Circuit (listed below).  It appears that the 9th Circuit has already been ruling along the lines of McDaniel since 2015.

In re Christoff, 9th BAP (284.0 KB)
In re Kashikar, 9th BAP (200.5 KB)

In re McDaniel, (10th Cir August 31, 2020) Plaintiffs-appellees Byron and Laura McDaniel claimed they discharged some private student loans in their Chapter 13 bankruptcy. Defendant-Appellant Navient Solutions, LLC (“Navient”), the loans’ creditor, moved to dismiss the McDaniels’ claim under Federal Rule of Civil Procedure 12(b)(6), contending that the loans were excepted from discharge under 11 U.S.C. 523(a)(8)(A)(ii). This case raised a question of first impression to the Tenth Circuit of whether an educational loan constituted “an obligation to repay funds received as an educational benefit,” within the meaning of section 523(a)(8)(A)(ii). The Court concluded that it did not, therefore, the Court affirmed the bankruptcy court’s interlocutory order denying Navient’s motion, and remanded the case for further proceedings.

Their amended plan provided instead, “[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until end of plan.” Id. at 83 (Am. Ch. 13 Plan, filed Apr. 1, 2010). The plan, as amended, defined Class Four claims as “[a]llowed unsecured claims not otherwise referred to in the Plan.” Id. at 82. It did not indicate whether certain Class Four claims, deferred claims, or educational-loan debts were excepted from discharge. No one objected to the amended plan on a ground relevant to the issues before us. In March 2015, the bankruptcy court granted the McDaniels a discharge of their debts under 11 U.S.C. § 1328(a). Its brief order, however, did not identify which of their debts were thereby discharged. As relevant here, it simply stated that “[d]ebts for most student loans” were not discharged. Id. at 98 (Order Providing Discharge of Debtor After Completion of Ch. 13 Plan, filed Mar. 3, 2015). In June 2015, the court deemed the McDaniels’ bankruptcy estate “fully administered” and closed their case. Order, In re McDaniel, No. 09-37480 (Bankr. D. Colo. June 2, 2015). Over the next two years, however, the McDaniels paid Navient an additional $37,460 on their Tuition Answer Loans. In June 2017, the McDaniels moved the bankruptcy court to reopen their case. After the court did so, the McDaniels filed a complaint against Navient, seeking 1) a declaratory judgment that their Tuition Answer Loans were discharged in bankruptcy, and 2) damages based on Navient’s collection activities on those loans in violation of 11 U.S.C. § 524(a). The McDaniels stated that the loans “were not ‘qualified education loans’” under 11 U.S.C. § 523(a)(8)(B) because they “were not made solely for the ‘cost of attendance’” at Laura McDaniel’s college.

A student loan servicing company’s failure, over the course of five years, to respond to an adversary complaint and multiple court orders, justified a finding of contempt and sanctions against the servicer requiring it to pay off the debtor’s student loans to the DOE in the amount of $354,629.62, and pay damages to the debtor in the amount of $24,000. Leary v. Great Lakes Educational Loan Services, No. 15-11583, Adv. Proc. No. 15-1295 (Bankr. S.D.N.Y. Sept. 8, 2020).

In re Seth Koeut, 12-07242-MM7, (S.D. CA 10/27/20) Court finds Koeut has given his best effort to maximize his earning potential to date, but will not achieve his maximum salary, if at all, without a partial discharge of nearly all his student loans.  Koeut will also need two years of additional experience and retraining before this can occur.  The court also finds that Koeut’s reasons for rejecting the IBR are sound since he justifiably believes an IBR will continue to depress his credit score and hinder his employment opportunities and financial stability.  Even if Koeut eventually maximized his potential, his salary will still be insufficient to enable him to make any more than minimal payments on his student loans.  Since Koeut cannot in good faith be expected to pay more than he will ever afford without suffering an undue hardship, the student loan balanced he cannot pay will be discharged and he will be required to pay rent. Order – A partial discharge of $432,173.99 of Koeut’s student loans will be ordered, leaving a balance of $8,291.67 with interest to accrue at .11%.  Koeut will be required to make payments of $41.87 per month to the DOE from 12/31 to 12/48.