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12 June 2013

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 June 12, 2013
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A lot of people struggling with student loan debt call our office.  The usual question is whether those loans can be forgiven.  The general rule is that student loan obligations are nondischargeable in bankruptcy, unless the person filing for bankruptcy can prove an “undue hardship.”  This is found in Bankruptcy Code Section 523(a)(8).

A recent case coming out of the 9th Circuit Court of Appeals (which governs over the Bankruptcy and District Courts in California) explained what it means to show an undue hardship.  The case, Hedlund v. Educational Resources Institute, explains that the 9th Circuit follows the Brunner test.  Brunner is a case from the 2nd Circuit.  The Court in Brunner held that a debtor asking for a discharge of student loan debt 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 the 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.

The 9th Circuit in Hedlund also explained that for the last element “good faith” is measured by the debtor’s efforts to obtain employment, maximize income, and minimize expenses.

The facts of the Hedlund case were that the bankruptcy debtor went to law school, obtained a law degree, but could not pass the Oregon State Bar Exam after multiple attempts.  He had over $85,000 in student loan debt with one lender.  The Bankruptcy Court discharged all but $30,000 based on the facts of the case.

The moral of the story is that student loan discharges are rare.  But, if you qualify based on the Brunner test, you have the potential ability to eliminate such debt.  If you are interested in discharging student loan debt, contact the Henshaw Law Office today.

 

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