Kentucky Bankruptcy Law

Counsel with Care

Chapter 7 and Student Loans

Student loans are not automatically discharged in a bankruptcy. It requires an adversary proceeding, which is a lawsuit within a lawsuit, in order to determine if student loans are discharged. The factors that have to be met make discharge of student loans relatively rare. However, that is not the purpose of this post. Rather, I wanted to explain what does happen to the student loans.

Once the holder of the student loan is notified of the Chapter 7, the loan is recharacterized in their computer system and no action will be taken until the bankruptcy ends. Sometimes the characterization of the student loan as in bankruptcy never gets changes back, which can cause problems later on. However, the debtor can still make payments on the student loan during the Chapter 7, but they will be provided a different address to send the payments. Unfortunately, this notice may take months to be sent out.

If possible, I recommend that the debtor continue to make payments voluntarily during the bankruptcy. This avoids the interest piling up and increasingly the total amount due. It also helps satisfy one of the factors if the debtor later attempts to discharge these loans, even if the payments are less than the full payment due.

January 25, 2018 Posted by | Bankruptcy, Chapter 7, Student loans, Uncategorized | , , , , , , | Leave a comment

Update on Discharge of Student Loans

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.


July 25, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Student loans | , , , , , , , , , | Leave a comment

Discharge of Student Loans: The “certainty of hopelessness” test

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.

April 27, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Student loans | , , , , , , , | 2 Comments