Suffering an Unfair Job Loss is Tough, our california employment attorneys can help.

Ninth Circuit Reinstates Partial Discharge of Law School Loans in Bankruptcy - Hedlund v. The Educational Resources Institute

June 11, 2013

We've written recently about a rash of cases in which appeals courts have reversed lower courts' findings that student loans should not be discharged in bankruptcy. The standard for this is high; ever since the 2005 changes to the bankruptcy laws, student loans of any type can only be discharged on a showing of "undue hardship," a difficult standard that can also be vague. As a result, there's no chance to discharge student loans for most bankruptcy filers, keeping them in debt perpetually despite the troublesome job market for recent graduates. Vincent Howard and our San Bernardino personal bankruptcy attorneys are especially aware of this problem as to recent law school graduates, who often have six figures of debt when they leave school but face a tough job market. That's why we were interested to see Hedlund v. The Educational Resources Institute, a decision of the Ninth Circuit.

Michael Hedlund took out Stafford loans to get an undergraduate business degree from the University of Oregon and a law degree from Williamette Law School. Unfortunately, he never passed the bar exam, and subsequently took a job that paid $10 an hour. After he ran out of hardship forbearances, he requested loan consolidation; a call to check on the status of that request revealed that his application was never received and he was no longer eligible because he was in default. He concluded that he wasn't eligible for an income-based repayment plan, but still couldn't make his payments. One loan holder, PHEAA, offered him repayment plans he couldn't afford and refused his offer of plans he could afford. He did pay $954 out of an inheritance, and his wages were garnished starting in 2002.

In 2003, Hedlund filed for bankruptcy and started an adversary proceeding seeking partial discharge. He settled with one loan holder and proceeded to trial against PHEAA, whose settlement offer required monthly payments of $307. The bankruptcy court ultimately discharged all but $30,000 of the PHEAA debt. However, the case was appealed up to the Ninth Circuit and ultimately sent back to the bankruptcy court, where it had to be reassigned because the original judge had died. The new judge discharged all but $32,080 of the loans. On appeal, the district court reversed, finding the bankruptcy court erred in its analysis of whether Hedlund had made good-faith attempts to repay his loans.

The Ninth Circuit reversed. Only good faith was at issue in this decision. Good faith is measured by efforts to get a job, minimize expenses and negotiate a payment plan. The district court had ruled that Hedlund didn't adequately minimize his expenses or attempt to negotiate a payment plan, faulting his wife for not working and him for rejecting the PHEAA's settlement offers and not exploring the income-based repayment plan. The Ninth first agreed with Hedlund that the district court should have reviewed for clear error, and then agreed with the bankruptcy court's analysis of the good faith test. Mrs. Hedlund's underemployment is not a factor in her husband's bad faith, the court ruled, and the bankruptcy court's evaluation of their expenses was not clearly erroneous. The evidence of Hedlund's attempts to repay could be interpreted as bad faith, the Ninth said--but again, the bankruptcy court's choice was not clearly erroneous. Thus, it reinstated the partial discharge.

Vincent Howard and our Irvine consumer bankruptcy lawyers are very interested in this case, because it echoes other student loan discharge cases we've seen recently that turned on bad faith. Bankruptcy courts may be friendlier to debtors during the good faith evaluation because they deal every day with other people's financial choices and have been thoroughly exposed to bad choices. District courts' work is more varied. Unfortunately, the current situation with student loans forces people like Hedlund to allow strangers to second-guess their financial choices (and sometimes, those of their spouses). At Howard Law, P.C., our Norco individual bankruptcy attorneys would prefer that Congress repeal the "undue hardship" rule altogether, limiting this scrutiny.

If you're struggling to repay student loans or other debts you don't believe you can ever realistically afford, you should call Vincent Howard and the team at Howard Law, P.C. You can call us toll-free at 1-800-872-5925 or send us a message online.

Similar articles:

Ninth Circuit BAP Reverses Denial of Student Loan Debt Discharge for Pro Se Filer - In re Janet Rose Roth

First Circuit Upholds Sanctions Against Student Loan Company for Collecting on Paid Off Debt - Hann v. Educational Credit Mgmt Corp.

Seventh Circuit Permits Woman to Claim Undue Hardship on Student Loans - Krieger v. Educational Credit Management Corp.