VICTORY FOR DEBTOR ATTEMPTING TO DISCHARGE STUDENT LOANS

As a Sacramento bankruptcy attorney I have previously written about student loans and filing a Chapter 7 or Chapter 13 bankruptcy. The general rule regarding student loans is that they are not dischargeable unless the individual can prove that paying the loans would create “undue hardship.” Undue hardship is a difficult standard to prove as it is indeed a vague concept. I would typically tell my clients that undue hardship exists when a person has zero ability to earn any income. As a result, there is a low chance at discharging student loans for most bankruptcy filers. This situation creates a vicious cycle for many recent graduates who have entered the uncertain job market of the last few years.

A recent case from the United States Ninth Circuit Court of Appeal, Hedlund v. The Educational Resources Institute, reminds us that there are still some situations where a person can get the debts discharged through bankruptcy.

The debtor in this case, Michael Hedlund, obtained student loans on his undergraduate and law school degrees. Mr. Hedlund received a business degree from the University of Oregon and a law degree from Willamette Law School. He failed the bar exam and took a job earning approximately $10.00 an hour. After requesting hardship forbearances and loan consolidations Mr. Hedlund wound up defaulting on the loans. He was not able to implement any successful attempt at a modified repayment plan although he made several payments from various bank accounts when he could. The student loan creditors eventually began to garnish his wages.

Hedlund filed for bankruptcy in 2003 and initiated an adversary proceeding to receive a partial discharge of his debts. He was able to settle with some creditors but ultimately went to trial with PHEAA. After trial the bankruptcy court discharged all but $30,000.00 of this remaining debt. PHEAA appealed, to the Ninth Circuit where it was remanded back to the bankruptcy court. Upon remand the case was reassigned to a different court since the original judge had died unexpectedly. The new judge discharged all but $32,000.00. PHEAA appealed this new ruling to the local district court, which found that the new judge had made an error with regard to the analysis of whether Hedlund made a “good-faith” attempt to pay the student loans. The District Court judge found that Hedlund did not attempt to negotiate a payment plan or minimize his expenses all while having an unemployed wife.

On appeal, the Ninth Circuit reversed the District Court’s decision and reinstated the partial discharge. The appellate court reviewed the issue of “good-faith” exclusively. In its reasoning the Appellate court found that the new bankruptcy judge had applied the law properly and was well within his discretion to determine the issue of Mr. Hedlund’s “good-faith” attempts to make the payments. The case luckily turned out well for the debtor in this case.

I am happy to see an instance where an individual was able to successfully argue the “undue hardship” standard for discharging student loans. Sadly, I cannot imagine the emotional toll and expense Mr. Hedlund incurred as a result of having to appeal the decisions multiple times. The fact remains the bankruptcy code is presently incongruent with the needs of individual debtors when struggling to make ends meet and saddled with monstrous student loan debt. Bankruptcy law is designed to protect people like Mr. Hedlund but is seriously lacking in an arena that applies to a large portion of our population.