Deshur Law Firm LLC, Attorneys & Lawyers  Bankruptcy, Chicago, IL

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    Are Student Loans dischargeable through bankruptcy?

    Section 523(a)(8) establishes that student loans are not dischargeable unless a debtor can prove “undue hardship” on him/her or the debtor’s dependents as a result of not discharging the debt. Undue hardship “encompasses a notion that the debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond reasonable control.” In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993). Moreover, “[u]ndue hardship is not simply a financial burden; there is a presumption that debtors who feel obligated to seek bankruptcy protection are financially burdened.” In re Gearhart, 94 B.R. 392, 393 (Bank. W. D. Pa. 1989).

    Many courts, including the Seventh Circuit, apply the “Brunner test” to determine whether undue hardship exists. To meet the Brunner test, the debtor must show the following characteristics:

    (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;

    (2) that additional circumstances exist indicating that this state of affairs is likely to persists for a significant portion of the repayment period of the student loans; and

    (3) that the debtor has made good faith efforts to repay the loans.
    Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).

                Needless to say, the Brunner test is extremely difficult to jump over all three hurdles. Congress has shown a clear trend to make discharge more difficult. Courts are generally in agreement that ordinary or “garden variety” hardship, however defined, is insufficient. At an extreme are courts that require extraordinary circumstances such as the total physical incapacity of the debtor.

    However, while not granting discharge of the entire student loan, some courts have provided creative relief. For example, “where debtors have not been awarded undue hardship discharges, courts have utilized their equitable powers to provide partial discharges, grant payment deferrals or modify payment schedules.” Hafner v. Sallie Mae Servicing Corp. (In re Hafner), 303 B.R. 351, 356 (Bankr. S.D. Ohio 2003).

                Notably, there has been some recent push to bring about change regarding the difficulty of student loan discharge in bankruptcy. For instance, the concurrence in Roth called for the Ninth Circuit to “reconsider its adherence to Brunner. Hon. Jim D. Pappas stated that “bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.” 490 B.R. at 920 (Pappas, J., concurring). He also stated that the determination of “undue hardship is too narrow, no longer reflects reality, and should be revised.” Id. Judge Pappas concluded that “requiring that a debtor demonstrate that his or her financial prospects are forever hopeless is an unrealistic standard.” Id.

                The question of whether a student loan is discharged based on undue hardship is not automatically determined in a bankruptcy proceeding. The debtor must affirmatively seek such a determination. If the debtor fails to do so, and a loan holder subsequently attempts to collect on a loan, the loan’s dischargeability can be resolved at that later date either by the bankruptcy court upon reopening of the case or by a state court in a proceeding relating to collection of the note. In general, though, it is best to resolve the loan’s dischargeability in the bankruptcy court while the case is originally pending. To do so the debtor must file an adversary proceeding in the bankruptcy court seeking a declaratory judgment that the student loan debt is dischargeable.   Although some are urging the courts to reconsider the meaning of “undue hardship” with respect to student loans, Brunner remains to be the current standard.

    While we hope for Congress and the Courts to come up with a more lenient standard than the “Brunner” standard, we can help you defer your student loan payments while you are in bankruptcy. Deshur Law Firm LLC has successfully deferred payments on thousands of student loans for a period of five years or longer.


    Is it possible to finance a car while you are in a Chapter 13 Bankruptcy?


    In Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, the Supreme Court specifically found that “advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause. Advice to incur additional debt to buy groceries, pay medical bills, or make other purchases ‘reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor’s similarly permissible.” Id. 130 S. Ct. at 1339 n.6. Furthermore, the Court held that, although an attorney cannot advise a client to incur more debt for an impermissible purpose, “a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.” Id. at 1337-1338 (citing ABA Model Rule of Professional Conduct 1.2 (d) (2009)).

    As long as the client requests to purchase a vehicle in good faith and is in a position to proceed, the Bankruptcy court will allow the debtor to purchase another vehicle.

    One of our clients owned a 1999 Cadillac Escalade and wished to purchase a used 2006 Chevrolet Monte Carlo instead. The 1999 Escalade had failed multiple emissions and was breaking down. However, execution of any sale is contingent upon the Bankruptcy Court entering an Order allowing sale of the subject property. Our firm proved to the Court that debtor would be selling her vehicle for fair market value, which would allow her to pay for a new vehicle outside of her Chapter 13 Plan and still maintain a feasible budget. Her motion was granted and she was able to purchase a new car.

    We had another client whose car was impounded as a result of accumulating post-petition parking tickets. The Debtor had insufficient funds to pay the impound fees, which necessitated surrendering the vehicle. Yet, she still needed a new vehicle to get to work. We were able to persuade the Court that the Debtor’s disposable income was sufficient to afford a car payment outside of her Chapter 13 plan, and the financing was granted.

    Incurring additional debt or purchasing a new car is perfectly allowed as long as we can show the Court that client is in a position to do it, requesting it in good faith, and the existing Plan is still feasible.