Student Loans: No Discharge in Bankruptcy UNLESS You First Attempt Administrative Options

student-loan-debtIn filing for bankruptcy protection, the consumer cannot expect that student loans will be discharged along with normal consumer debt, like credit cards.  The reason is that the Bankruptcy Code, under 11 U.S.C. § 523 (a)(8) states that student loans are nondischargeable, unless the consumer is able to bring a separate lawsuit and show, in this separate lawsuit, that being forced to repay the student loans, would constitute “undue hardship.”  The bankruptcy code does not define what “undue hardship” is.  So the courts have come up with their own definition:


  • the debtor cannot maintain, based on current income and expense, a minimal standard of living for herself and her dependents if forced to repay the loans


  • that additional circumstances exist indicating the this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and


  • the debtor has made good-faith efforts to repay the loans.


The burden is on the Debtor to prove each of these elements, by a preponderance of the evidence.  That much has been the law in bankruptcy court for a long time.  Now, the Northern District of Ohio has issued an opinion which denies such a lawsuit, specifically because the Debtor did not take advantage of administrative options which exist outside the bankruptcy court.  The case is Mirigalia v. U.S. Dept. of Education and you can see the entire opinion here.


On February 28, 2015, Beverly Miraglia filed her Chapter 7 bankruptcy petition. Among her debts, she listed debts to the “Dep of Education/NelNet,” a student loan for $24,130, and to the “US Dept of Education,” in the amount of $32,587.38.”  She filed a lawsuit, called an “adversary proceeding,” on June 15, 2015.  In this adversary proceeding, she alleged the existence of the three factors listed above, and the Department of Education opposed this lawsuit.


The Court granted “summary judgment” to the Department of Education.  Summary judgment is a ruling by the Court that the moving party has shown that there is no genuine issue as to any material fact, and the moving is entitled to judgment as a matter of law.


The Court seemed very sympathetic to the Debtor’s position on the first standard listed above.  Her net income for 2016, the Court found, would be $10,666.12, a very modest income by any standard.  Even with an additional $330 per month in food stamps, the Debtor’s income was still so modest that she was unable to maintain even a minimal standard of living.


The Court turned to the second prong of the analysis, whether the Debtor’s financial circumstances would persist for a significant portion of the student loan repayment period. Here the Court was less sympathetic, and criticized the “vague and unsubstantiated” evidence submitted.  In summary, if you are considering bringing an adversary for student loan discharge, be prepared with medical records or other competent evidence to show specifically what medical illness or medical disability you suffer from, what treatment you receive or have received for them, how likely it is you recover from them, and (this is important) that they are beyond your control, not borne of free choice.  “The debtor must have done everything within their power to improve their financial situation.”


The final prong of the analysis was the fatal blow to the student loan discharge.  The Court found that Debtor in this case did not make any payment on any student loan.  The Court observed further that the Debtor had been offered, but then declined to pursue, income based options.  This, the Court said, makes it “difficult” to allow an adjustment of their student loan debt in bankruptcy.  In this case, the Court pointed out, the Debtor may have even eligible for a permanent disability discharge.  However, she began her application, and then failed to provide required documentation, which resulted in the denial of the application.


The Debtor seeking discharge of student loan debt through an “undue hardship” adversary must prevail on all three prongs.  Just meeting one or two, regardless of the sympathetic nature of the Debtor’s circumstances, will not succeed.  The main issue in this case, in the author’s opinion, is that the Debtor will also not succeed in such an adversary unless the Debtor first seeking administrative remedies outside of bankruptcy court.


It should be noted that this case deals only with federal student loans.  The other type of student loan debt out there is private student loan debt, where no administrative options exist.  Private student loan debt requires a separate discussion.  A student loan attorney can help you evaluate the best option for your situation.  You can call me at 216-642-8234 to schedule an appointment to discuss student loan options, and I will make an appointment with you to review all appropriate loan documents, together with my recommendation for a plan to deal with them.  The federal student loan administrative options are much less expensive, do not involve litigation, and offer a much better rate of success.

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