Section 523(a)(8) of the Bankruptcy Code excludes certain student education loans from bankruptcy discharge, “unless the exclusion of these debt from discharge under this paragraph would impose undue hardship “. By its terms, section 523(a)(8) leaves available to statutory interpretation whether a debtor can acquire relief under the law if he demands repayment of all “those” debts would impose undue hardship while only requiring repayment of some “such” debts would not be. A recent ruling in the United States Bankruptcy Court for that District of Kansas provides a stark instance of the issue as it follows Tenth Circuit precedent allowing a “partial discharge” in certain circumstances. Ultimately, the bankruptcy court granted a partial discharge as the amount of all these debts exceeded $225,000.
In this example, Loyle v. US Dept of Ed., 2022 WL 567724 (Bankr. Kan. Feb. 24, 2022), debtors sought to forgive student loans totaling $435,320. Following a trial, a legal court assessed the evidence to find out if the debtors faced undue hardship using the triple Brunner[1] test, which required debtors to show:
(1) the debtor[s] cannot maintain, on the basis of current income and expenditure, a “minimum” standard of living for [themselves] and [their] dependents if they're obligated to repay loans; (2) there are additional circumstances indicating this state of affairs is likely to persist for any significant portion of the education loan repayment period; and (3) that the debtor[s] Ha[ve] made good faith efforts to repay the loans.[2]
Although the evidence showed that the debtors had a monthly disposable income of $1,749, the evidence also showed that this amount was under the monthly interest accrued on the loans. Moreover, evidence demonstrated that the debtors were maximizing their income and that their situation was likely to persist for most, if not completely, of the 25-year payment term. Significantly, the debtors were within their 40s and were “not seeking to repay their student loans right after graduation.”[3] And since graduation, they'd repaid about $45,000. Based on all the evidence, that is put down in much more detail within the notice, the court concluded that repaying their student education loans entirely would impose an undue hardship around the debtors under section 523(a) ( 8).
But the court didn't release all student loans from debtors. Instead, a legal court considered whether “to exercise its equitable powers [under section 105(a)] to allow partial relieve student loan debt,” and then concluded that $225,000 of debt was not dischargeable because debtors could repay that amount without undue hardship.[4] Finally, the non-dischargeable debt was allocated on a pro-rata basis, so that some of each from the student loans was non-dischargeable.
Decisions like Loyle can open the door to government borrowers[5] student loans certain to discharge a minimum of some of the education loan debt even if they cannot meet the strict standard of demonstrating undue hardship for that entirety from the debt.
FOOTNOTES
[1] Brunner vs. Ny State Higher Educ. Serves. Corp., 831 F.2d 395 (2nd Cir. 1987).
[2] Loyle, 2022 WL 567724 at *7.
[3] Identifier. At 11 o'clock.
[4] Identifier. to *13.
[5] In August 2022, the bankruptcy protector wrote about recent rulings that permit debtors to release private student loans, instead of government-backed student education loans, without the need to prove undue hardship. See “There is Consensus That Some Private Student Loans Could be Forfeited in Bankruptcy”.
Copyright (c)2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 61