U.S. Ninth Circuit - The FindLaw 9th Circuit Court of Appeals Opinion Summaries Blog

Law Student Gets Hardship Discharge of Student Loan Debt

Like many law grads, Michael Headlund hasn't had the easiest time, economically. Though he graduated back in 1997, he's had the same experience as recent grads, with over $100,000 in student loan debt and no hope whatsoever of paying it off.

Ten years ago, he filed for bankruptcy after The Educational Resources Institute (TERI) and Pennsylvania Higher Education Assistance Agency (PHEAA) demanded payments far beyond his means. TERI ended up settling for a payment plan, but PHEAA fought to prevent partial or full discharge of his remaining $85,000 or so in debt.

The bankruptcy court ruled in his favor, but the Bankruptcy Appellate Panel reversed. The Ninth Circuit vacated the BAP's holding and remanded the case for consideration the three-part Brunner test. The bankruptcy court judge passed away in the meantime, leading to more delay and a case reassignment.

The test requires Headlund to show 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 likelyto persist for a significant portion of the repayment period; and
  3. the debtor has made good faith efforts to repay the loans

The first two prongs were undisputed, as Headlund is a law grad, who never passed the bar, in a single income family, in a historically bad economy for law graduates. Money-wise, there is no hope.

The real dispute is whether he has made attempts to pay his debts in good faith.

The "good faith" test measures the debtor's efforts to obtain employment, maximize income, and minimize expenses. While the bankruptcy court found that he has acted in good faith, PHEAA made a number of compelling arguments that swayed the district court to reverse. They argued about the unreasonableness of a single income family, that Headlund could pick up a part-time job, that he lived in freaking Kamath Falls (where?), and that he didn't attempt to negotiate a payment plan.

The district court was in error, however. They are supposed to review the case for clear error, not de novo.

The Ninth Circuit applied the proper standard and reversed, highlighting a few of the lower court's findings, such as the finding that failing to pass the bar was not "within his control", that he was making decent money for his situation, had applied to more lucrative positions without success, and that his family's standard of living was reasonably frugal.

Interesting note: the court differentiated this case from In re Mason by pointing out that the debtor in that case had only failed the bar once, while Headlund had made three attempts (two fails, plus one unfortunate incident where he locked his keys in his car). Is this the only time failing the bar three times means you save $50,000?

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