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Bankruptcy Appellate Panel Affirms Order Discharging Student Loan Debt - Shaffer v. Iowa Student Loan Liquidity

November 9, 2012

At Howard Law, P.C., our Riverside County personal bankruptcy attorneys are very interested in the growing call to change how student loans are treated in bankruptcy. Until 2005, only federally backed student loans were exempted from discharge--but under the 2005 changes to the bankruptcy code, all student loans were exempted. As a result, it is now very difficult to get out from under overwhelming student loan debt, because filers must show "undue hardship," as the bankruptcy judge defines it. In Shaffer v. Iowa Student Loan Liquidity, the student loan company unsuccessfully challenged Susan Shaffer's discharge of her loans. Shaffer suffers from depression and several related physical and mental health problems that have substantially limited her career and thus her income, and the Eighth Circuit Bankruptcy Appellate Panel saw no reason to overturn the dischargeability finding.

Shaffer is single, with no dependents. She attended college on and off between 1994 and 2002, when she received a bachelor's degree in psychology, and also attended a community college and a chiropractic school. At the end, she had $204,525 in student loans, with about half owed to Iowa Student Loan Liquidity and the remainder to the federal government and Educational Credit Management Services. Between 2008 and 2011, she had three full-time jobs, plus a period when she was unemployed and making ends meet through retirement funds, personal loans from family and disability benefits. She also took two leaves of absence from one job because of her depression. She filed for Chapter 7 bankruptcy in 2010, then filed a complaint to determine dischargeability of her student loans. After a trial, the bankruptcy court determined that an undue hardship existed, and granted the discharges.

Iowa Student Loan appealed, arguing first that Shaffer "admitted" she could make payments of $350 to $400 a month in testimony. In addition to deferring to the bankruptcy court, the BAP said even a casual reading of the transcript showed her lack of confidence. The company also argued that because Shaffer had in the past spent more than the court deemed reasonable, she could make her loan payments. The BAP again disagreed, saying that even if Shaffer had lived beyond her means in the past, that isn't evidence that she should continue to live beyond them to make student loan payments. The company also claimed that Shaffer's income limits are self-imposed because she dropped out of chiropractic school when she realized she couldn't pay her loans. The BAP found no reason to assume she would have ultimately been a chiropractor with enough income to pay, and again deferred to the bankruptcy court as fact-finder. Finally, the panel disagreed that expert testimony was required to prove the effects of Shaffer's mental health problems on her employment, noting that caselaw expressly contradicts this.

Vincent Howard and our Orange consumer bankruptcy lawyers are pleased to see a dischargeability finding on the difficult issue of student loans. A college degree is an important tool for getting ahead in life, but the cost of education has outpaced inflation, and the economy is tough for recent graduates. As a result, many people are now wrestling with the kind of overwhelming debt that might be discharged if it were another kind of unsecured debt, such as credit card bills. And because the 2005 changes to the law lock debtors into their loans regardless of affordability, bankruptcy isn't as much help to such people as it once was. Vincent Howard and our San Bernardino individual bankruptcy attorneys would be delighted to see a change in the law, but we also help debtors seek discharge or work with their other finances to get relief.

If you're stuck with so much debt that you don't believe you can ever pay it back, and you're ready to consider bankruptcy, don't wait to call Vincent Howard and the team at Howard Law, P.C. For a consultation, you can reach us through our website or call toll-free at 1-800-872-5925.

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