School Loans and Bankruptcy Discharge

Proponents of relief for student loan borrowers in bankruptcy had reason to cheer this month in both Washington and Oregon. Student loan obligations are presumptively non-dischargeable in bankruptcy absent a showing of “undue hardship.” 11 U.S.C. § 523(a)(8). To determine if a debtor has shown undue hardship, courts follow the three-part test from Brunner. See In re Pena, 155 F.3d at 1111–12. Under Brunner, the debtor must prove that: (1) he cannot maintain, based on current income and
expenses, a “minimal” standard of living for himself and his dependents if required to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans.

In Hedlund, a recent 9th Circuit(Washington and Oregon are member states in this circuit) decision, the Court took what appears to be a more forgiving view of what might constitute good faith efforts to repay the loans (the third prong). Previously, it was not possible to obtain a discharge of student loan without a showing of near Herculean efforts to repay the loans. In Hedlund, it appears that courts may no longer require debtors to show that they attempted to do the impossible. Hedland, the plaintiff, showed that he did something, suffering 16 months of garnishments and voluntarily made less than a $1000 in payments over a four year period and that was enough to meet the third prong.

We hope that this is the start of something good, maybe even something great. Student loan creditors and collectors have been getting away with murder and third prong had been a difficult prong to meet.

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