Court Decision Offers Hope in Student Loan Bankruptcy Relief

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A recent bankruptcy case indicates there is hope for individuals filing for bankruptcy with student loan debts. A 9th U.S. Circuit Court of Appeals partially discharged the student loans of Michael Hedlund after a 10 year battle in court. Ordinarily, debt from student loans cannot be discharged through the normal bankruptcy process. For student loans, borrowers must file for a separate lawsuit within their bankruptcy claim known as an adversary proceeding. An adversary proceeding states that repaying the student load would cause “undue hardship” to the borrower. Since the term “undue hardship” is such a subjective term, it is often difficult for student loan borrowers to find relief. Hedlund’s partial victory could have significant implications for other borrowers.

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Photo courtesy of SalFalko

Hedlund accumulated $85,000 in undergraduate and law degree student loan debts. After failing the bar exam 3 times, Hedlund ultimately found a career as a juvenile counselor. Hedlund filed for bankruptcy at age 33 with a wife and child.

Because Congress does not detail what qualifies as an “undue hardship,” the Brunner standard is typically applied by the courts. The Brunner standard requires borrowers to prove three aspects. Firstly, the borrower must prove he and any dependents are unable to maintain a minimal standard of living on his or her current income and expenses. Secondly, the borrower must show that the current living situation would not improve for a significant amount of the repayment time period. And thirdly, the borrower must show he or she acted in good faith to repay his student loans.

Because a second filing is needed to discharge student loan debt, and many individuals filing for bankruptcy cannot afford an attorney, it’s assumed that most people will be swayed from filing. Hedlund was represented pro bono by one of the country’s top bankruptcy firms, Morrison and Foerster, something that most people do not have access to. Also, Hedlund’s 10-year case is much longer than most people are probably willing to take on, although his case was delayed in part by the judge’s passing.

However, it’s worth noting that one of Hedlund’s student loan holders settled with him almost immediately after he filed his adversary proceeding, which should be encouraging to borrowers who are considering filing. The 9th Circuit Court agreed with the bankruptcy court’s reasonable application of Hedlund’s circumstances to meeting the Brunner standard, which should also be encouraging for future filers.

If you are feeling overwhelmed by debt, and would like to discuss your options with an experienced bankruptcy attorney, contact DeLuca and Associates at (702) 252-4673 for a free consultation.

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