Wednesday, July 18, 2012

Student Debt Discharged

Many students today take out large loans in order to finance their educations and then spend years paying back those loans.  Some commentators have likened this phenomenon to indentured servitude.  Whether it's smart to borrow to pay for education, undergraduate or graduate, has been the subject of much discussion.  Student loans are not normally dischargeable in bankruptcy (see 11 U.S.C. 523(a)(8)(B)) unless the obligation imposes an "undue hardship" on the borrower or his dependents; the statute doesn't define "undue hardship," and a number of courts have applied the test articulated by the United States Court of Appeals for the Second Circuit in the Brunner decision.  In In re Brunner, 831 F.2d 395 (2d Cir. 1982), the court required the petitioner who sought to discharge student loans to prove that she couldn't maintain a minimal standard of living if she had to repay the loans; demonstrate that her financial position was unlikely to improve for a significant portion of the loan repayment period; and show that she had made a good-faith effort to repay the loans.  This standard is rarely met, and most people with student loans do not get the fresh start they seek.

However, Judge Michael Kaplan of the Bankruptcy Court of the Western District of New York ruled recently in In re Bene that the facts presented in that case were so compelling that they warranted a discharge.  Unfortunately, the case probably doesn't offer much hope to law students trying to discharge their student debt because the result is very fact specific.  Donna Bene, the petitioner, is sixty-four years old, works on an assembly line, earns $11 an hour, and recently got a layoff notice.  The judge noted she had no hopes of a higher income and "no option that she might choose in order to improve her ability to repay $56,000 in student loan debt."  She had never finished her college degree and paid off what she could of her debt.  She supported her elderly parents. Judge Kaplan noted that she hadn't made mistakes or bad choices.  The decision is extremely narrow, and it is unlikely most other debtors would present such a compelling justification for a discharge of their student loans.

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