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Want to Discharge Student Loan Debt? Fail Bar, Wait 10 Years

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By William Peacock, Esq. on May 23, 2013 12:02 PM

It’s a much-lamented fact of life that student loan debt is basically non-dischargeable. Can’t pay your credit card debts? File bankruptcy. Can’t handle hospital bills? File bankruptcy.

Can’t pay your student loans? Move to Djibouti.

For one lucky law grad, however, he’ll be slightly closer to debt-free, despite three failed attempts at the bar, a single-income household, and the Ninth Circuit’s affirmation of a lower court’s holding that even if he were to pass the bar, he probably wouldn’t make much more than he does now.

Michael Headlund, Willamette Law Class of 1997, first tried to discharge his student loans in bankruptcy ten years ago. The two lenders that were harassing him handling his debt were The Educational Resources Institute (TERI) and Pennsylvania Higher Education Assistance Agency (PHEAA). He settled with TERI before proceedings commenced, but PHEAA's payment offers were unrealistic for his limited income.

Discharging student loan debt requires a showing of "undue hardship," which is done through the three-part Brunner test (paraphrasing here):

  1. Your minimal standard of living will suck beyond tolerance if you make payments;
  2. Circumstances exist that eliminate all hope that things will get better;
  3. You've made good faith efforts to avoid being a deadbeat.

He's a law grad, without a license, living in a one-income family. That's what we call a low standard of living. And the requested loan payments, which were anywhere from thousands of dollars per month, to around $450 by the time of the initial bankruptcy filing (thirteen years ago), would make such an already modest lifestyle impossible.

As for things getting better, have you checked out the legal job market lately? Even if he passed the bar, and were to find a job, he probably wouldn't be making more than the poverty level, especially if he has to make loan payments.

And good faith? Well, the tried. He made a few payments, including part of an inheritance lump sum (the rest went to other creditors). The actual test involves efforts to obtain employment, make mad stacks of cash, and to live on a budget.

The lower court made a few interesting findings, such as the finding that failing to pass the bar was not "within his control" (though the third time, he didn't actually show up, as he locked his keys in his car. Out of his control? Yes. Good faith effort? Meh.). He was also making decent money for his situation, had applied to greater things without success, and that he was living reasonably frugally (though the cable bill was excessive).

In balance, the bankruptcy court found good faith, and the three Brunner elements were satisfied. The district court reversed, but applied the wrong standard of review, leading the Ninth Circuit to reaffirm the original ruling, thirteen years after the original filing. We'll have a more technical, and slightly-less snarky analysis of the opinion on our Ninth Circuit blog shortly.

Ten years to save about $55,000? How many years for $150,000?

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