A recent decision out of the Norther District of California Bankruptcy Court bolsters a position I have already been espousing. In re Christoff, 510 BR 876 (N.C. Cal. 2014) looked at 11 USC Sect. 523(a)(8) which makes three types of loans non-discharged unless certain things are proven in an adversary proceeding (a lawsuit within the bankrutpcy). The three types of loans are, in essence: government subsidized loans, IRS qualified education loans, and “an obligation to repay funds received as an educational benefit, scholarship or stipend[.]” 11 USC Sect (a)(8)(A)(ii).
This case involved Meridian University directly funding the debtor’s studies in their Psychology program and whether that constituted the third type of debt above. The court ruled against Meridian because that statutes says “repay funds” thus requiring that actual funds are distributed. Instead, Meridian simply kept a “tab” of sorts of what the debtor owed them for tuition and fees. There was no third-party lender involved that distributed funds to Meridian or to the debtor.
I expect this would be the same outcome if such a debt discharge were challenged here in the Eastern District of Kentucky. This impacts many technical schools that simply charge the student debtor directly for tuition rather than involving an independent third-party lender. It is very good news for student debtors who went to such schools and then discover their training is not quite as marketable as the school led them to believe. So, the student debtor in the case above had student debt, but not a student loan.
I am doing a series on timing between filings of bankruptcies and began looking at the time between two Chapter 7 filings. Today is looking at the time between Chapter 13s. As I stated previously, the issue is not when one can file, but when one can receive a discharge in the subsequent case. The time issue for a 13 to a 13, unlike other scenarios, is open to litigation.
If the preceding bankruptcy was a Chapter 13, then you cannot receive a discharge in a subsequent Chapter 13 if it is filed two (2) years or less from the prior Chapter 13. However, it remains unclear in the Sixth Circuit (including Kentucky) if this means two years from the discharge of the prior Chapter 13 or the date the first Chapter 13 was filed. See 11 USC Sect. 1328(f)(2). I believe the most likely reading is from filing date to filing date due to the similarity in language of the statute. However, one should be aware that this has not been squarely decided in the Sixth Circuit and there are arguments on the other side. The main argument on the other side is that it really makes no sense to have a two-year period when Chapter 13s run three to five years, but that really only makes this statute cover a rare situation, not an impossible one.
4) If the preceding bankruptcy was a Chapter 13 (or Chapter 12), then you cannot receive a discharge in a subsequent Chapter 7 if the Chapter 7 was filed within six (6) years of when the preceding bankruptcy was filed. See 11 USC Sect. 727(a)(9). There are two exceptions: if there was 100% payment to unsecured claims in the Chapter 13 or if there was 70% repayment AND it was the Debtors’ best effort.
5) If there was no discharge in a preceding Chapter 7 or Chapter 13, then there is no time limit on filing with regard to receiving a discharge. However, there is an impact on the automatic stay which is not covered here.
When I say “within” I advise to wait that period of years and then one can file the day after that period has run.
I began looking a the time between Chapter 7s if one wishes to receive a discharge. The time frame is different when the subsequent case is a Chapter 13 showing the favored status of Chapter 13 bankruptcy. If the preceding bankruptcy was a Chapter 7 (or Chapter 11 or 12), then you cannot receive a discharge in a subsequent Chapter 13 if is filed four (4) years or less of when the Chapter 7 was filed. See 11 USC Sect. 1328(f)(1).
If one gets a discharge of unsecured debt in a Chapter 7 but still has some non-dischargeable priority debt in income taxes, they may want to turn right around and file a Chapter 13 without waiting the four years because they will be paying the debt in full over the length of the plan. So, there is no need for the discharge. This is a strategy discussion to have with your attorney.
Not long ago I wrote a post specifically about the treatment of student loan debt here in the Eastern District of Kentucky Bankruptcy Court. In my post I noted the strenuous test for discharge in this district, but the student loan debt issue is a looming time bomb nationwide. Fewer and fewer college educated persons are gaining employment in their field of study leading to defaults on student loans. Bankruptcy rarely offers relief from this mounting debt issue that will likely impact us as a nation a few more years down the road.
The Consumer Financial Protection Bureau (CFPB) and U.S. Department of Education released a report addressing the worsening issues surrounding mounting student loan debt and abuses cropping up with private student loans. The National Association of Consumer Bankruptcy Attorneys (NACBA), of which I am a member, summarized the 131 page report this way:
Among the recommendations to Congress: Revisit the harsh treatment of private loans in bankruptcy. The report finds that since adoption of the Bankruptcy Act of 2005, which made private student loans nondischargeable in bankruptcy, there has been rapid growth in questionable lending practices, compounding the risk to student borrowers. The report also found little to no evidence that restricting bankruptcy rights improved either loan prices or access to credit. The CFPB and Education Department both recommend in the report that Congress revisit this unfair restriction of bankruptcy relief for private student loans. Email from Maureen Thompson, NACBA Legislative Director dated 7/20/12
I encourage anyone interested in this issue to contact their Senators to support a bill pending to restore bankruptcy protections to private student loan debt.
Student loans have received considerable press coverage in our persistently lagging economy. So many graduates of higher learning institutions find it difficult to secure jobs in their given field of study. Even the fortunate ones who do land a job in their field of training still struggle to pay their student loans because the cost of a degree has skyrocketed in recent years. Colleges and graduate programs have faced cuts in government funding resulting in ever higher tuition.
The legal profession is a prime example of this student loan trap. We now have one lawyer for every 257 persons in America when just a few decades ago it was 1 lawyer for every 750 person. Basically, it really is true that one cannot swing a stick without hitting a lawyer (okay, put the sticks down!). And yet, law school tuition has increased dramatically in recent years. A law student easily rack up $100,000 to $200,000 in student loans, but few obtain high paying jobs. Many other professions are facing this same dilemma.
Even though student loans are unsecured debts, 11 USC Sect. 523(a)(8) precludes their discharge in a Chapter 7 or Chapter 13 unless repayment creates an undue hardship. The Sixth Circuit appellate courts (which set case law for Kentucky bankruptcy courts) adopted the Brunner test:
The Brunner test requires the debtor to prove, by a preponderance of the evidence, (1) that the debtor cannot maintain, based on current income and expenses, a minimal standard of living if forced to pay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Many folks meet the first and third prongs of that test, but the second prong is nigh on impossible. As tough as the second prong of Brunner is the way it is written, the Eastern District of Kentucky has interpreted it even more stringently in a decision penned by Judge Joseph Scott, Jr. The case, In re Gibson, issued January of 2010, holds that the debtor must show a “certainty of hopelessness” to satisfy that second, forward looking prong.
Judge Scott states that “…the second prong is not met as Debtor has not shown a certainty of hopelessness as the Debtor may continue to get raises in her current job or find a better paying job as Debtor is only 26 years old with a college degree and her learning disabilities appear to be controlled.” The Debtor did have a teaching degree, but failed twice to obtain a teaching certificate. Such a narrow view of Brunner’s second prong to discharge student loans leaves me scrambling to imagine a situation where a student loan would be discharged short of substantial, irreversible physical impairment. The best hope for debtors crushed by student loans in the Eastern District of Kentucky is for Congress to pass legislation that would bring relief.
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