Student Loans are not dischargeable automatically

June 2, 2010 - PRLog -- Some courts have found it appropriate to defer repayment on a debtor’s student loans or stay execution of student loan debts for a period of years post petition and order the cessation of the accrual of interest. Alternative student loans may be dischargable depending on the use of the loan and the source of the loan. Some permit some variance from the general rule of complete discharge or nondischarge. Others indicate that a partial discharge is not allowed.  The bankruptcy court is said to lack the authority to fashion ad hoc remedies by restructuring debt or limiting repayment amounts.  The Sixth, Ninth, Tenth and Eleventh all agree that student loan debt cannot be discharged, wholly or partially, without satisfying the undue hardship requirement of § 523(a)(8). Some judges may consider the total amount of educational loan debt and the proportion of such debt to total indebtedness in order to determine whether the dominant purpose of the bankruptcy filing is to discharge student loans. Other judges may regard this motive as irrelevant since the normal reason for bankruptcy is to avoid the consequences of debt.
For dischargeability of an NHSC debt, the loan must be at least seven years old, measured from the first date when repayment of the loan was required, exclusive of any period after that date in which the payment obligation was suspended, and the bankruptcy court must find that the non-discharge of the debt would be “unconscionable,”a high standard indeed. The debtor’s ability to make a living from practice in the field of medicine or health services for which the loan was obtained is immaterial. Apparently so is the voluntariness of the breach. In a 2007 decision, the debtor resigned his position at a residential treatment center for Indian youth when it was discovered that he failed to disclose his criminal history on his employment application forms, and that history “affected his suitability under the Indian Child Protection and Family Violence Prevention Act, which was a condition for both his participation in the LRP and for his federal employment at the treatment center.” Even though this debtor’s resignation was an alternative to being fired, the court upheld the financial penalties for the debtor’s breach of the service required to satisfy his student loan and refused to discharge the resulting debt.
Armed with these statutes and judicial interpretations, the holders of student loans may, and commonly do, wait until after the debtor’s case has been concluded, either through performance of the plan or issuance of a Chapter 7 discharge, to then make demand for payment of the loan, or to execute against the debtor’s now less encumbered assets. Thus, if the Chapter 13 plan does not effectively deal with the student loan, the situation will eventually come to the debtor’s notice and it is not impossible to imagine that the debtor might assert a claim for damages for malpractice unless there is a clear document trail showing the problem was addressed as well as could be under the circumstances of the case.
In all cases, the debtor has the burden of bringing an adversary proceeding  and obtaining a judgment of dischargeability. The prudent practitioner will advise the debtor of the jurisdiction’s case law on this point, confirming this advice in writing, and will address the cost and hazard of an adversary proceeding and any subsequent appeal in the attorney-client employment contract. This lets the debtor make an intelligent and informed decision on how to proceed.

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I have been a licensed attorney since 1992. I have passed a rigorous examination and extensive experience requirements by the State Bar of California, Board of Legal Specialization. My firm helps prepares many different types of bankruptcy petitions. They will be prepared and filed in the Bankruptcy Court where the bankruptcy records will be stored for many years.