Bankruptcy judge wipes out over $ 430,000 in student loans for borrower with chain of bad luck

In a rare decision, a California bankruptcy court cleared a borrower of over $ 430,000 in student loans.

The bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers usually have to prove they have “undue hardship” in order to pay off their student loan debt in bankruptcy. These restrictions initially applied only to federal student loans, but were later extended to cover private student loans following the passage of a bankruptcy reform bill in 2005.

The “undue hardship” standard applied to student loan debt is not adequately defined in law, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine eligibility for credit. the Liberation. The most common of these tests is the Brunner test.

In order to try and prove that they meet the undue hardship standard, borrowers must initiate “adversarial proceedings,” which is essentially a lawsuit in a bankruptcy case brought against student lenders in the United States. ‘borrower. In adversarial proceedings, the borrower must present evidence demonstrating that they meet the undue hardship standard, while student lenders present evidence to the contrary. Adversarial proceedings can be a long and invasive process for borrowers, and can be quite expensive for those who use private attorneys. Student lenders may also have significantly more resources than borrowers, which may give them an edge in the litigation. As a result, many student loan borrowers fail to prove undue hardship, and many others don’t even try.

But a California bankruptcy judge ruled earlier this month that a student loan borrower with a string of bad luck meets that difficult standard.

The borrower in the case had incurred substantial student debt to attend medical school (hundreds of thousands of dollars in student debt is not uncommon for graduates of medical degree programs, considering expected high income). However, the borrower was unable to obtain residency after graduating from medical school. He was forced to take various low-paying jobs and earned less than $ 35,000 per year between 2010 and 2017. In at least a year, he earned only $ 3,000. The borrower claimed he applied for thousands more jobs during this time, but was unsuccessful.

The borrower filed for bankruptcy and entered into adversarial proceedings in an attempt to prove that he met the standard of undue hardship. The court ultimately ruled in his favor.

In support of its decision, the bankruptcy court noted that the borrower’s expenses consistently exceeded his income, despite his constant efforts to get a better-paying job. The court also noted his lack of reserve funds, the fact that his future employment prospects depended on additional retraining expenses and his willingness to take on any type of employment he could find in the previous decade. The court further concluded that it was unlikely that its overall financial position would change substantially in the future, based on the evidence presented.

The bankruptcy court concluded that the borrower’s overall student loan debt should be reduced from $ 440,000 to $ 8,291.67, and allowed the borrower to pay off the small remaining balance at the rate of 41, $ 87 per month.

Notably, in rendering its decision, the court rejected an argument by the US Department of Education that the borrower should be denied relief because he had not taken advantage of the income-based repayment programs, which can provide affordable payments and eventual loan forgiveness to federal students. loan borrowers even for borrowers with large balances. The court rejected this argument as the large balance itself affected her credit and limited her employment prospects. The court also noted that there could be significant tax consequences associated with a possible loan forgiveness under an income-driven repayment plan, and this was factored into the decision as well.

the Case, Koeut v. US Department of Education, in the Southern District of California, is the latest in a series of cases across the country that have allowed borrowers to get off their student loans in bankruptcy, despite the difficult process and demanding standard that ‘they must respect in court.

However, efforts are underway to reform the bankruptcy code to make it easier to release student loans. Last week, Democratic House and Senate lawmakers unveiled the Consumer Bankruptcy Reform Act, 2020. The bill, if passed, would amend the bankruptcy code by simply removing the section of the code that exempts student debt from discharge. Student loans would not be treated any differently from other forms of consumer debt and could be discharged without adversarial proceedings and without having to prove “undue hardship”. The bill would also enact other important reforms, including restructuring bankruptcy procedures, improving consumer protection against creditors and expanding the ability to discharge certain other debts.

The bill has little chance of being passed by the Republican-controlled Senate during the Lame Ducks session. But his chances could improve depending on the outcome of Georgia’s January runoff election, which will determine which party controls the Senate after Joe Biden takes the presidency on January 20.

Further reading

Major bankruptcy reform bill would allow release of student loans and make other dramatic changes

New details: Biparty stimulus bill would extend student loans and unemployment relief to millions

DeVos Extends Student Loan Relief Until 2021: What You Need To Know

These student loans are not covered by the DeVos relief extension

New stimulus bill could extend student loan relief and unemployment benefits – but does not include any cash payments

Could Biden write off some student debt with executive action?

What the election results mean for student loan borrowers

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