Bankruptcy Article #6

"Undue Hardship" is Mitigated by Partner's Income Lorenz v. American Educational Services Update: 2/1/2006

The First Circuit Bankruptcy Appellate Panel reversed a Bankrutpcy Court decision which had granted an undue hardship discharge of a student loan. The Panel held that the debtor’s life partner’s income had a substantial effect on the debtor’s actual and necessary expenses (since the debtor and his partner acknowledged having one financial household) and should have been taken into account in the undue hardship determination.

Certain Student Loans Not Dischargeable Smith v. Educational Credit Management Corp Update: 6/6/2005

The Bankruptcy Appellate Panel reversed a bankruptcy court decision that certain student loans were dischargeable. The Appellate Panel held that the bankruptcy court failed to conclude that the debtors met the “totality of circumstances” test or the In re Brunner test. Debtors did not show that both current and future income were insufficient to pay their student loans, so the bankruptcy court decision could not be upheld.

Answers about Bankruptcy and Student Loans

"Is an individual able to discharge (eliminate) student loan debt?"

11 U.S.C. Section 523(a)(8) reads in large part, as follows:

(The Bankruptcy Code) does not discharge an individual debtor from any debt for an educational benefit over payment or loan made, insured, or guaranteed by a governmental unit, or made by any program funded in whole or in part by a governmental unit or non profit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.

In short, this means no...

This statutory section was amended in October of 1998. Prior to October 1998, student loans that had been due and payable, not including deferment periods, for more than 7 years, could be discharged by the filing of a bankruptcy petition. After October 1998, that opportunity to discharge student loans was eliminated and the above provision enacted into law. It essentially means that student loans are neverdischargeable unless the payment of such debt would impose an undue hardship on the debtor or the debtor's dependents.

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What constitutes an undue hardship?

Undue hardship can depend upon the particular Bankruptcy Court ruling on that issue. In some Bankruptcy Courts, undue hardship essentially requires a debtor to not be able to provide a poverty level standard of living before the Court will discharge the debt. Other Courts will not find undue hardship unless a debtor is disabled (as that term is defined under Social Security law). In Maine, the leading decision is In re Kopf, 245 B.R. 731 (Bankr. D.M.e. 2000). This case can be found in the U.S. Bankruptcy Court's website,; check under "Judge's Corner" for the complete decision issued by Judge Haines. His analysis is likely to be followed in future cases where a hardship discharge of student loans is sought.

A debtor considering his or her prospects in discharging student loans should understand that the debtor's current and future income and expenses will be examined very closely by the Court and the lending institution. To the extent that the debtor can pay back a portion of the student loan debt, it is very possible that the Bankruptcy Court could discharge a portion of the student debt but not all of the debt. Some bankruptcy courts have concluded that multiple student loans can be broken into dischargeable and non-dischargeable student loans. The consolidation of many student loans into one may reduce the likelihood that the Bankruptcy Court will adopt a partial discharge of student loans.

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Caselaw Examples

Two decisions by the First Circuit Bankruptcy Appellate Panel may be helpful in understanding how the discharge of student loans will be determined by a Maine Bankruptcy Court. Additional cases are pendinf before the Supreme Court and will be decided in 2010.

In Educational Credit Management Co. v. Kelly, 312 B.R. 200 (1st Cir. B.A.P. 2004), a 41 year old Debtor who had 6 separate (non-consolidated) student loans, had a degree from law school but had failed to pass the Massachusetts Bar Exam five times, had 3 part time jobs with $30,000 income maintained minimal living expenses, was allowed to discharge 4 of the 6 student loans under a "totality of the circumstances" test described in the Kopf case.

In Educational Credit Management Co. v. Savage, 311 B.R. 835 (1st Cir. B.A.P. 2004), a debtor was unable to demonstrate "undue hardship" where she was employed earning $38,300 per year plus child support. She also paid approximately $327 per month for a son's private school tuition and books. The Bankruptcy Appellate Panel concluded the debtor's payment of the private school expenses demonstrated there was no "undue hardship" since it did not reflect a minimal standard of living for the debtor and her dependents if forced to repay the loans. Lifestyle choices will be closely evaluated in attempting to discharge student loans.

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Consider your Options

Student loans are often one aspect of a debt crisis. If you are in Maine and find yourself in a difficult financial situation, with persistent creditors calling or student loans unpaid, you should learn about all of your options before planning your debt relief. Don't fall prey to creditors or unreliable refinance companies.

Please call my office to learn all your rights and options: (207) 283-3777