Bankruptcy and Student Loans

March 29, 2012
By Scott D. Schwartz from Rust, Armenis & Schwartz on March 29, 2012 11:25 AM

Student loans continue to be a drag on the economy in Northern California because it is difficult to get any form of relief from a student loan. This is true even if you are unemployed as a result of the economic recession. Lenders have no incentives to work with borrowers since the debts are generally non-dischargeable in bankruptcy and the federal government has made no effort to help students despite helping financial institutions and homeowners in the economic recovery.

The total outstanding student debt appears to have surpassed $1 trillion late last year, according to officials at the Consumer Financial Protection Bureau (CFPB), a federal agency created after the financial crisis. Student loans may be dischargeable in Chapter 7 or Chapter 13 bankruptcy if you can show that repayment would impose an undue hardship on you and your dependents. Student loans may also be dischargegable after they are no longer collectable.

The Ninth Circuit Court of Appeal recently reviewed the seven year timing of collectability of a student loan under 11 U.S.C. § 523(a)(8)(A) (1990) in Poynter v. U.S. 2012 U.S. App. Lexis 6168, CasThumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Supreme Court.jpge No. 10-56751 (9th Cir. 2012). In the case, Eric Poynter (debtor) filed a chapter 7 bankruptcy and on March 1994, the debtor received a discharge. Following the bankruptcy, the Department of Education continued to attempt to collect on the student loan. On September 2008, the debtor reopened his bankruptcy case for the purpose of obtaining a declaration that his 1985 educational loans were discharged in his bankruptcy.

The Bankruptcy Court and District Court determined that the loans were not dischargeable. The Ninth Circuit Court of Appeals reviewed the case and focused on whether or not the student loans were due more than seven years before the filing of the bankruptcy petition pursuant to 11 U.S.C. § 523(a)(8)(A) (1990). Under Section 523, if the student loans were due more than seven years before the filing, they would be uncollectible. Here, the critical date was October 27, 1986. The debtor argued that two provisions of the promissory notes caused the loans to become due by October 27, 1986. The debtor argued his grace period had run by September 1986 because he was not carrying at least one-half the normal academic workload because he stopped attending most of his classes. The Ninth Circuit ruled that enrollment, not attendance, was the issue. The debtor next argued that according to the terms of the loan the note would become "immediately due and payable" upon default. The debtor argued the failure to notify the lender of a change in enrollment status constituted a default. The Ninth Circuit rejected this argument finding that although such failure could constitute default, the lender had the discretion over when to declare a default, and when to demand repayment. There was no evidence that the lender demanded repayment more than seven years before the debtor filed for bankruptcy.

If you are having a problem paying your student loans, bankruptcy may be able to help you either by discharging other debts to help you afford the student loans or by discharging the debts if repayment would impose an undue hardship or they are no longer collectable. In addition, if the debt is not dischargeable, you may be able to lower your payments to an amount you can afford in a Chapter 13 bankruptcy. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.