Thursday, October 29, 2009

Participation in Deferral Payment Program Does Not Preclude Student Loan Bankruptcy Discharge

Case Law Update:

In re Booth, 410 B.R. 672 (Bankr. E.D. Wash 2009). A chapter 7 bankruptcy debtor brought an adversary complaint against a student loan creditor seeking discharge of the student loan debt pursuant to Section 523(a)(8) of the Bankruptcy Code alleging that an “undue hardship” would result if the debtor had to repay the student loan debt. Prior to filing bankruptcy, the debtor had participated in a student loan deferral payment program. As a result of the program and debtor’s deteriorating financial position, the student loan creditor established a zero dollar per month short-term repayment plan with the balance to be paid much later. Nevertheless, debtor filed for bankruptcy and sought a complete discharge of all the student loan debt.

The student loan creditor opposed the complete discharge of the student loan debt. In fact, the creditor filed a motion for summary judgment seeking an order finding the student loan debtor NOT eligible for a bankruptcy discharge AS A MATTER OF LAW because the deferral payment program had granted debtor a zero dollar per month short-term repayment plan. In short, the student loan creditor believed that the debtor could not establish “undue hardship” as a matter of law since debtor had agreed to a zero dollar short-term repayment plan and therefore no hardship existed, much less “undue” hardship.

The Court rejected the student loan creditor’s argument and denied the motion for summary judgment. The court noted the difference in relief granted by both options: (a) the bankruptcy discharge offered permanent relief by eliminating the student loan debt forever, whereas (b) the deferral payment program only offered short-term relief with the balance coming due later. Next, the court focused on the factual review given by both options: (a) the bankruptcy court would review the facts of each case on a case-by-case basis to determine if the repayment of the student loan debt would result in an undue hardship upon the debtor, whereas, (b) the deferral payment program gave no individual review, instead relying upon a formula to determine loan payments.

The conclusion is that the student loan debtor was allowed to go forward with the bankruptcy case and will be offered an opportunity to prove that the payment of the student loan debt would be an undue hardship on the debtor and debtor’s dependents.

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

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