June 30th, 2009

In filing a bankruptcy case, the goal of the filer is to obtain a discharge. The discharge is essentially an order of the bankruptcy court that permanently bars creditors from seeking payment on certain debts. While most debts are discharged through the bankruptcy process, student loans are an exception to this rule. This leads to the question, what qualifies as a student loan?

The Bankruptcy Code is very broad in its defining of student loans. Not only are government backed student loans such as Stafford, Direct, or Perkins loans non-dischargeable, but the Code sugoes further and excepts “any indebtedness incurred…solely to pay higher education expenses” from being discharged. See 11 U.S.C. §523(a)(8); see also 26 U.S.C. § 221(d)(1). Such a broad definition encompasses most loans obtained for educational expenses.

The only exception to this hard and fast rule is if there is a finding of undue hardship by the bankruptcy court. However, as recently demonstrated in a 4^th Circuit case, obtaining a finding of undue hardship can be extremely difficult. In the recent 4^th Circuit case, a debtor sought to discharge her student loans because she was unemployed and diagnosed with cancer. In denying her request to discharge her student loans, the court stated, “Being diagnosed with cancer, without more, does not necessarily mean that the debtor cannot take advantage…of the excellent education she received.” See In re Robinson, 19 CBN 766 (Bankr. E.D. Va. 2009).

As demonstrated above, it is difficult to discharge student loan debt. However, if you happen to live within the jurisdiction of the 9^th Circuit (and if you live in Arizona, you do), there may be another way to discharge your student loan debt. The court held that in a Chapter 13 bankruptcy case, a debtor can discharge their student loans through their Chapter 13 plan if the lender has notice that the plan provides for the discharge of the student loan. A Chapter 13 bankruptcy requires that the debtor put together a written plan that outlines how the creditors will be dealt with. In short, if the debtor provides that his student loans will be discharged in his Chapter 13 plan, and the lender fails to object, the court will deem those student loans discharged. See Espinosa v. United Student Aid Funds, Inc. 553 F.3d 1193 (9^th Cir. 2008).

This approach by the 9^th Circuit is at odds with courts around the rest of the country and as such the United States Supreme Court has agreed to hear arguments on the Espinosa case in the fall of 2009. However, as for now, Arizona and those other states within the jurisdiction of the 9^th Circuit can still seek to discharge their student loan debts through their Chapter 13 plans.

Arizona Bankruptcy Attorney John Skiba offers a free bankruptcy consultation to discuss your current situation and how the bankruptcy laws can help you obtain debt relief.