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Bankruptcy Appellate Panel Affirms Rare Undue Hardship Student Loan Discharge - In re Jorgensen

October 15, 2012

At Howard Law, P.C., our Riverside County individual bankruptcy lawyers often have to tell clients that student loans are rarely dischargeable in bankruptcy. More than 30 years ago, most loans were dischargeable; subsequent changes have exempted first loans involving a nonprofit, then almost all loans, from discharge unless the borrower can show "undue hardship." Undue hardship is not well defined, but it's generally considered a high bar, and few people are granted a discharge for undue hardship. The borrower who filed for bankruptcy in In re Jorgensen was an exception. Stacy Marie Jorgensen filed for bankruptcy after multiple treatments for pancreatic cancer drained her finances and left her too sick to work full time. She filed for Chapter 7 bankruptcy and was granted an undue hardship discharge of her loans; the Bankruptcy Appellate Panel of the Ninth Circuit later affirmed it.

Jorgensen was 44 with no dependents at the time of the decision, and an assistant professor of geography at the University of Hawai'i at Manoa. She made timely payments on loans of $36,284.81 from the time they started in 2002 until 2010, when she was diagnosed with cancer and obtained a forbearance. Her doctors currently say she is cancer free, but her treatments left her with problems so serious that she has trouble maintaining a full workload. She filed for Chapter 7 bankruptcy in October of 2010 and sought discharge of the student loans. Her paperwork showed more expenses than income; she testified to the bankruptcy court that she did not accept a payment plan with a reduced student loan payment because it didn't take into account her ability to pay. The bankruptcy court applied the Brunner test and determined that Jorgensen met all prongs, but nonetheless declined to discharge all of her student loan debt because it wasn't satisfied with her explanation of a car purchase or rent savings from a planned semester abroad. Nonetheless, it discharged all but $8,045.02 of her loans.

Her lender, Educational Credit Management Corporation, appealed, but the BAP of the Ninth Circuit affirmed the partial discharge. Under the Brunner test, a hardship discharge is appropriate when the debtor 1) cannot maintain a minimal standard of living if required to repay the loans; 2) circumstances suggest that this will persist for a significant portion of the repayment period; and 3) the debtor has made a good-faith effort to repay the loans. Furthermore, bankruptcy courts have discretion to order partial discharges if they feel all three prongs only apply to some of the debt. In this case, the panel agreed with the bankruptcy court that all three prongs were met, but that a reduction was appropriate to account for the "windfall" Jorgensen received by not paying rent while teaching abroad, and for the payments on a car Jorgensen could have waited to purchase. Deferring greatly to the bankruptcy court as fact finder, the BAP affirmed its judgment.

Vincent Howard and our Colton consumer bankruptcy attorneys are pleased to see a rare success for a bankruptcy filer seeking to discharge student loan debt. The issue of student loans and bankruptcy is becoming visible nationwide, as education debt climbs and jobs remain relatively scarce. It's rare (though not rare enough) that people are driven into bankruptcy by a diagnosis with an aggressive cancer, but many more bankruptcy filers are simply overwhelmed by their student loan debt and unable to modify it because of the non-dischargeability rule. Student loan debt is one of the few kinds of debt that is treated this way, and critics say the rule is nothing more than a gift to the financial industry without a solid public policy goal behind it. Vincent Howard and our Anaheim personal bankruptcy lawyers would be pleased to see any of the proposed policy changes take place.

Based in Santa Ana, Howard Law represents Californians of all backgrounds who are considering bankruptcy protection as a way to deal with overwhelming debt. If you'd like to learn more about your rights and your options, call Vincent Howard and our team today at 1-800-872-5925 or send us a message online.

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