Presenting a live 90-minute webinar with interactive Q&A Discharging Student Loan Debt in Bankruptcy: Borrower and Creditor Perspectives Bankruptcy Code Provisions; Educational Loan Types; Relevant Cases; Partial Discharge; Specialized Treatment in Chapters 7 and 13 WEDNESDAY , DECEMBER 11, 2019 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: John T . Baxter, Attorney, Nelson Mullins Riley & Scarborough , Nashville, Tenn. Natalie Jean-Baptiste, Founder, Law Office Of Natalie Jean-Baptiste , Uniondale, N.Y . Kurt A O’Keefe, Founder, Detroit Bankruptcy Lawyer Kurt O’Keefe , Detroit The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1 .
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Student Loans and Bankruptcy
Student Loans – An Overview • Two Types of Student Loans: Federal & Private • Federal Loans • FAFSA (Free Application for Federal Student Aid) • Perkins Loan • Direct Loans • Generally limited based on information provided in the FAFSA • Subsidized by the Government (depending on information in FAFSA) 6
Student Loans – An Overview • Private Loans • Typically No FAFSA • Require a credit-check on the front-end – may need a cosigner • Provided by banks, credit unions, and other typical lending institutions • No governmental subsidies 7
Student Loans – An Overview • Key Differences • Federal: Deferral typically an option; income-based repayment; potential for loan forgiveness • Private: Dependent on credit score; higher interest rates unless excellent credit; amount not limited by FAFSA; typically no deferral to payment while in school, though some lenders may provide 8
Student Loans – An Overview • Student Loan Servicers • MOHELA • OSLA • Navient • EdFinancial • Great Lakes • Nelnet • HESC/FedLoan • American Education Services • Granite State 9
Educational Loans in Bankruptcy • Section 523(a)(8) – The Battlefield in Bankruptcy • A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt – • (a) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for– • (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or • (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or • (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of t he Internal Revenue Code of 1986, incurred by a debtor who is an individual . . . . 10
Educational Loans in Bankruptcy • Unpacking Section 523(a)(8) – Three Types of Loans Covered • A “qualified education loan,” as defined by the Internal Revenue Code • An educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit or non-profit institution • E.g. payments under the G.I. Bill above the amount needed for tuition • An obligation to repay funds received as an educational benefit, scholarship or stipend 11
Educational Loans in Bankruptcy • Co-Obligors Covered • Although the text of the statute appears to only apply to the person who receives the actual benefit of the loan, co-obligors (typically parents) typically fall within the discharge exception. • See In re Salter , 207 B.R. 272, 275 (Bankr . M.D. Fla. 1997) (“The exception to discharge provision as it relates to student loans applies even if the borrower is not a student but, as in the present instance, a parent.”) • But see, In re Pryor , 234 B.R. 716, 716 (Bankr. W.D. Tenn. 1999) (holding that comaker of student loan that was not student who received the educational training was not covered by discharge exception of section 523(a)(8)). 12
Educational Loans in Bankruptcy • Whether a loan is private versus federal can impact dischargeability • Typically, there is no question that federal loans fall within the discharge exception of 523(a)(8) • Purely private loans, however, may be more likely to be subject to discharge • A recent case is illustrative: Nitcher v. Educational Credit Management Corp. (In re Nitcher) , 18-03090 (Bankr. D. Ore. Aug. 23, 2019) • In Nitcher , the Bankruptcy Court discharged the majority of a debtor’s private loans, as the private lender had the sole decision-making authority to garnish wages to obtain the funds, a result the Bankruptcy Court determined would cause the debtor an undue hardship • Conversely, the governmental loans were payable on an income-based plan, so the debtor could eventually have the remainder discharged at the end of the payment period. • The Court discharged the bulk of the private loans, but did not discharge the federal loans. 13
Educational Loans in Bankruptcy • The Primary Points of Argument • (1) Does the loan meet the statutory definition of an educational loan? • (2) Is the loan federal or private? • (3) Is there an argument that the “purpose” of the loan or the use of the loan was not for an “educational benefit”? • (4) Is the debtor the primary obligor (e.g. student) or a co-maker of the loan? 14
DISCHARGING STUDENT LOAN DEBT IN BANKRUPTCY Natalie Jean-Baptiste, Esq. Law Office of Natalie Jean-Baptiste, P.C.
DISCHARGING STUDENT LOAN DEBT IN BANKRUPTCY Establishing Undue Hardship
Determining Undue Hardship Brunner Test – adopted by all circuits except First and Eighth Circuits. The burden of proof is on the debtor to establish undue hardship. The debtor must establish: 1. That the debtor cannot, based on current income and expenses, maintain a minimal standard of living for himself or herself and his or her dependents if forced to repay the loans; 2. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and 3. That the debtor has made good faith efforts to repay the loans. Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir.1987) 17
Determining Undue Hardship Totality of the Circumstances Test – adopted by the Eighth Circuit and some courts in the First Circuit. The Bankruptcy Court must consider: 1. The debtor’s past, present, and reasonably reliable future financial resources ; 2. A calculation of the debtor’s and her dependents’ reasonable and necessary living expenses ; and 3. Any other relevant facts and circumstances surrounding each particular case. Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (8th Cir.2003) 18
Totality of the Circumstances Test Multiple factors considered, including: • Total present and future incapacity to pay debt not in the debtor’s control • Good faith effort to negotiate a deferment or forbearance • Whether there is a long-term hardship • Whether debtor made payments on the loan • Permanent or long-term disability • Can debtor find gainful employment in her area of study • Efforts to maximize income and minimize living expenses • Was the dominant purpose of the bankruptcy to discharge the student loan • The ratio of student loan to total debt In re Jesperson, 571 F3d 775 (8 th Cir 2009) 19
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