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Federal bankruptcy law specifically excepts student loan debt from discharge, unless a debtor can meet the difficult burden of demonstrating “undue hardship” to themselves and their defendants. 11 U.S.C. § 523(a)(8). A recent decision from the Ninth Circuit Court of Appeals involved a Chapter 13 debtor’s claim that her student loan debt was dischargeable. The court affirmed the bankruptcy court’s order discharging most of the debt, reversing the district court’s order. Kelly v. ECMC, et al. (“Kelly I”), Adv. No. 2:10-ap-01681, judgment (Bankr. W.D. Wash., Jul. 18, 2011); ECMC, et al. v. Kelly (“Kelly II”), No. 2:11-cv-01263, order (W.D. Wash., Apr. 20, 2012); Kelly v. Sallie Mae, et al. (“Kelly III”), No. 12-35377, slip op. (9th Cir., Feb. 27, 2015).

According to the district court, the debtor obtained a degree from Seattle University in political science in 1992. By the time she filed for Chapter 13 bankruptcy in March 2008, her total student loan debt was more than $105,000. She filed an adversary proceeding in November 2010, claiming “undue hardship.” To establish undue hardship in most jurisdictions, a debtor must satisfy a three-part test, known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs. Corp., 831 F.2d 395 (2d Cir. 1987):  (1) At current income and expense levels, the debtor would not be able to maintain a “minimal standard of living” if required to repay the student loans; (2) additional circumstances indicate that this financial condition is likely to continue for a substantial part of the repayment period; and (3) the debtor has made “good faith efforts to repay the loans.”

The bankruptcy court found that the debtor had satisfied all three parts of the Brunner test. It ruled that all but $21,706.51 of her student loan debt was dischargeable and ordered her to repay the balance in $250 monthly payments over nine years.

The creditors appealed to the district court, which reversed the bankruptcy court’s order. The district court held that the bankruptcy court’s finding that the debtor had satisfied the first prong of the Brunner test was “a permissible conclusion from the evidence,” Kelly II at 4, and that “ample evidence” supported the finding that she had met the second Brunner prong, id. at 5. It disagreed, however, that the debtor had demonstrated a “good faith effort” at repayment. It noted that, as a city employee, she was apparently eligible for the Public Service Loan Forgiveness (PSLF) program, that she was aware of the program, and that she had not applied for it. The court also found that, while she had maximized her income, it was not convinced that she had minimized her expenses.

The Ninth Circuit reversed the district court’s order and reinstated the bankruptcy court’s partial discharge. It held that the district court failed to take certain aspects of the bankruptcy court’s analysis into account. Unlike the district court’s findings regarding expenses, the bankruptcy court found that the debtor had “incurred only marginally excessive expenses.” Kelly III at 3. The Ninth Circuit also held that it was not error for the bankruptcy court to conclude that the debtor did not apply for PSLF due to “a good-faith belief that she was ineligible for the program.” Id.

Attorney Devin Sawdayi has guided Los Angeles individuals and families through the Chapter 7 and Chapter 13 personal bankruptcy processes for more than 17 years. To schedule a free and confidential consultation to discuss your case, contact us today online or at (310) 475-9399.

More Blog Posts:

White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014

Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014

Ninth Circuit Bankruptcy Appellate Panel Considers “Good Faith” Requirement for Discharge of Student Loans, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2014