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Eighth Circuit Upholds Undue Hardship Discharge of Student Loans in Bankruptcy - Walker v. Educational Credit Management

August 29, 2011

Our Redlands individual bankruptcy lawyers were interested to read about a rare case in which a student loan was discharged in bankruptcy. Since 2005, discharge of private student loans has been possible only when the court finds "undue hardship" to the bankruptcy debtor from paying the loans back, and undue hardship is a notoriously difficult standard to meet. Nonetheless, the Eighth U.S. Circuit Court of Appeals found undue hardship in Walker v. Educational Credit Management Corp., an appeal brought by a private student loan lender as a creditor to debtor Michele Walker. Walker, of Wisconsin, received an undue hardship discharge because of the difficulties she and her husband would have in supporting their five children. The Eighth Circuit upheld the bankruptcy court's decision and its own Bankruptcy Appellate Panel.

Walker's student loan debt came from an undergraduate education at the University of Illinois, a premed licensing program at Creighton University, two years of medical school at Illinois and a master's degree at Governor State University. Her master's is in school psychology. She has worked most recently in that field with the Minneapolis Public Schools, but the position was cut in 2003 or 2004. Her husband is a police officer who moonlights as a private security officer, and they have five children, including two sets of twins. The elder set of twins has been diagnosed with autism. Walker has not worked outside the home since 2004, and spends much of her time caring for her autistic sons, who require a parent present for much of their therapy. She enrolled in a nursing program in 2007, but left due to problems caring for the children while attending school. The Walkers also incurred debts for a home equity line of credit and a new vehicle after she stopped working. Walker filed for Chapter 7 bankruptcy in 2004 and received a discharge, but filed an adversary proceeding in 2007 seeking to have $300,000 in student loans discharged as an undue hardship. The bankruptcy court and the Eighth Circuit's Bankruptcy Appellate panel granted the discharge, and Educational Credit Management (ECM) appealed.

ECM argued that undue hardship should be calculated as of the 2004 bankruptcy filing, not the 2007 adversary proceeding; and that the Walkers' household expenses are not sufficiently modest to allow an undue hardship determination. The Eighth Circuit disagreed. The undue hardship test requires courts to look at the totality of the circumstances, it said, and precedent requires judges to decide "in light of the debtor's actual circumstances at the relevant time." Furthermore, the court did not, as ECM argued, ignore Walker's husband's security guard income; this was accounted for in the family's adjusted gross income. It agreed that the lower courts may have counted some of his payroll deductions twice, but calculated that even when the disputed payments were added, the family's expenses still exceed its income. Finally, the court dismissed arguments that the family's expenses are not modest, based on the home loan and vehicle debts. A separate concurring opinion objected that the expenses may be unreasonable, but added that even without them, Walker could not make a projected student loan payment.

As Irvine personal bankruptcy attorneys, we are pleased to see that undue hardship discharges do occur, even when the lender challenges them all the way through to a federal appeals court. The 2005 adjustments to the bankruptcy laws that made private loans not dischargeable have attracted a lot of criticism, in part because of the perceived giveaway to private businesses. Prior to 2005, the undue hardship rule applied only to the federal government, which enjoys elevated status as a creditor in other ways as well. Extending that rule to private lenders is excellent for those lenders, but it arguably puts them at an unfair competitive advantage compared to other lenders. It also puts them in a position to exploit the financial naivete of students, many of whom are under 21 when they take out their loans. Our La Jolla consumer bankruptcy lawyers argue for an undue hardship exception for student loans whenever we believe our clients are eligible.

If you're in a tough financial situation and you'd like to talk with an experienced attorney about your options, call Howard Law, P.C., for a free consultation. You can reach us at 1-800-872-5925 or send us a message online.

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