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Student loan debt presents a significant problem for individuals seeking bankruptcy protection under Chapter 7 of the Bankruptcy Code. Federal law specifically excludes student loans from discharge, unless a debtor can show “undue hardship” to themselves or their dependents. 11 U.S.C. § 523(a)(8). Most courts have adopted a three-part test, known as the Brunner test, to establish undue hardship. The third part requires a debtor to show a good-faith effort to repay the student loan debt. This requirement is difficult to define, as the Ninth Circuit’s Bankruptcy Appellate Panel (BAP) showed in In re Roth, 490 B.R. 908 (BAP 9th Cir. 2013).

The debtor took out over $33,000 in student loans between 1989 and 1995. Thirteen loans were made through the Federal Family Educational Loan Program (FFELP), and five were made directly through the Department of Education (DOE). She reportedly made no voluntary payments on the FFELP loans, and had defaulted on all of them by 2001. She made one attempt to seek forbearance, by which she could reduce or postpone her payment obligations, but never attempted to restructure or modify the payment terms of the loans. The DOE garnished the debtor’s wages for its five loans. The debtor reportedly claimed that she thought the garnishment covered all eighteen loans. The FFELP creditor was apparently unable to garnish her wages because of the DOE’s garnishment order.

The debtor filed for Chapter 7 bankruptcy in January 2009, seeking discharge of all of the loans. She testified to the bankruptcy court that she suffers from multiple chronic medical conditions and physical injuries, which have impeded her efforts to find employment. The Brunner test, named for Brunner v. N.Y. State Higher Educ. Servs., 831 F.2d 395 (2nd Cir. 1987), requires a debtor to show inability to maintain a “minimal standard of living” if forced to continue loan payments, circumstances that make the current situation likely to persist for much of the repayment period, and “good faith efforts” at repayment. Id. at 396.

The FFELP creditor filed an adversary proceeding opposing discharge. It claimed that the loan balance was $95,404 as of January 2011. The bankruptcy court discharged the DOE loans, but not the FFELP loans, finding that the debtor had satisfied the first two parts of the Brunner test, but not the third.

The court found that the debtor was eligible for a plan to consolidate her loans, and that the creditor had recently advised her of this. She did not take advantage of the plan, however. No single act or omission proved a lack of good faith. Instead, the pattern of default, failing to restructure or seek forbearance, and failing to enroll in programs that would ease the payment burden cumulatively established a lack of good faith.

The debtor filed a pro se appeal, but the BAP affirmed the bankruptcy court’s ruling. It held that, while the debtor had made good-faith efforts to find employment and manage her expenses, the weight of the evidence supported a finding that she did not make good-faith efforts at repayment.

When a person’s debt payments exceed their ability to make payments from their available income, the bankruptcy system may offer relief. Bankruptcy attorney Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies for more than sixteen years. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (310) 475-939.

More Blog Posts:

Bankruptcy Court Grants Discharge of Student Loans, Finding that Debtor’s Mental Illness Constitutes “Undue Hardship,” Los Angeles Bankruptcy Lawyer Blawg, March 24, 2014

Supreme Court Decision Affirming Discharge of Student Loan Debt Prompts Possible Revisions to Chapter 13 Procedures, Los Angeles Bankruptcy Lawyer Blawg, January 12, 2014

With Interest Rates on Many Loans Set to Double Soon, The Dischargeability of Student Loans in Bankruptcy is a Crucial Issue for Future College Students, Los Angeles Bankruptcy Lawyer Blawg, September 23, 2013