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In re: Smyth v. EdAmerica Inc. Rules on Role of Bankruptcy in Student Loans

June 4, 2012

Orange County Bankruptcy Attorney Vincent Howard knows that when it comes to student loans, such debt can be difficult to discharge.studyinglate.jpg

In fact, simply being granted a Chapter 13 or Chapter 7 bankruptcy in Orange County is not enough to absolve a person of having to repay his or her student loans.

While a bankruptcy can help you discharge or modify other debts, such as those accrued by credit cards or auto loans, student loans are held to a higher standard.

This was illustrated once again in an appellate case out of Tennessee, In re: Smyth v. EdAmerica Inc.

Essentially, here's what happened:

Kellie Smyth filed for a Chapter 7 bankruptcy back in the summer of 2003. At that time, she did not list the holder of her student loans as a creditor. The notice of her bankruptcy filing was then sent to her other creditors.

Then a few months later, in October of that year, Smyth filed what's called an "amended Schedule F." This basically just means it's an updated version or addition to the bankruptcy filing. In this amended version, she listed EdAmerica as creditor, stating that they held her student loans in the amount of nearly $77,000.

A few days later, the court issued a general Chapter 7 discharge to Smyth. That just means she was granted a standard, run-of-the-mill Chapter 7 bankruptcy. This is where your assets are liquidated, and your debts are effectively canceled.

However, this type of bankruptcy does not erase certain forms of debt. Those include child support, most tax debts, criminal restitution and student loans - unless otherwise ruled by the court.

In order for the court to make that ruling, there needs to be an application for determination of undue hardship. At that point, the court will conduct a hearing about whether the individual is actually facing an undue hardship and is unable to pay.

This is a tough standard to meet, and there are generally three cornerstones by which judges will decide, according to what's known as the Brunner Test:

1. The debtor can not maintain a minimal standard of living if he or she must repay his or her student loans;
2. That circumstances exist that indicate that the current state of financial affairs is likely to continue throughout a significant portion of the student loan repayment period;
3. That the debtor has made a good faith effort to repay his or her loans.

Debtors generally have to meet all three before the court will agree to discharge student loan debt.

That didn't happen here. In fact, there was not even a hearing to determine whether the debtor met those qualifications.

So then in 2011, the debtor filed a motion to re-open the case, saying in fact that EdAmerica was not abiding by the Chapter 7 discharge and was still trying to collect the amount owed. But in fact, the student loans had not been subject to the Chapter 7 bankruptcy.

In addition to illustrating the difficulty of discharging student loan debt, what this also illustrates is the need for an experienced Orange County Bankruptcy Attorney like Vincent Howard, who is knowledgeable about bankruptcy processes and can offer sound legal advice about how to proceed.

Orange County Bankruptcy Attorney Vincent Howard at HOWARD LAW can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.

Additional Resources:
In re: Smyth v. EdAmerica Inc.

More Blog Entries:
Ninth Circuit BAP Permits Debtor to Prioritize Debt Guaranteed by Her Mother - In re Renteria, May 23, 2012, Orange County Bankruptcy Attorney