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Can Student Loans Be Discharged in Bankruptcy?

Legal Standard for California
Government guaranteed student loans cannot be discharged in bankruptcy unless, "excepting such debt from discharge ... will impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523 (West) (emphasis added). Undue hardship is determined using the Brunner three-part test. In re Pena, 155 F.3d 1108, 1114 (9th Cir. 1998); Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987). The debtor must establish (1) that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself or herself and dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good-faith efforts to repay the loans, which may involve an inquiry into the debtor's efforts to maximize income and to minimize expenses. Id. at 1111.

Element 1: You have to show that if you had to pay your student loans you could not maintain a minimal standard of living.
The first element of the Brunner requires the debtor to show that "based on current income and expenses, a minimal standard of living for himself or herself and dependents if forced to repay the loans." Pena 155 F.3d at 1111. "Debtors are not required to live at or below the poverty level to be entitled to a fresh start." In re Cota, 298 B.R. 408, 415 (Bankr. D. Ariz. 2003). "Minimal" is "a flexible and subjective term that can only have objective meaning in light of the particular facts of each case." Id. at 415 (quoting In re Afflitto, 273 B.R. 162, 170 (Bankr.W.D.Tenn.2001)). The court's task is to determine if the debtor can afford to support herself and her dependents if made to repay all or part of her student loans. Id at 413.

Will the purchase of a new car disqualify me?
Courts have concluded that the purchase of a new vehicle is not extravagant or excessive. See In re Hampton, 147 B.R. 130, 132 (Bankr.E.D.Ky.1992) (Holding that the purchase of a new car and a $422 monthly payment was reasonable); In re Wallace, 259 B.R. 170, 181 (C.D. Cal. 2000) (Concluding that the purchase of a $26,000 truck was reasonable); In re Pratt, 375 B.R. 753 (S.D. Tex. 2007) (Holding that the debtor did not fail to minimize her expenses by electing to purchase a new, more reliable motor vehicle at a cost of $558.39 per month). So, the purchase of a new car will not automatically preclude a debtor from meeting the undue burden standard for discharge of student loans. The McMillan Law Group has experience with these motions, and can advise you if the facts of your case hint at a possibility of meeting this element.

Element 2: You have to show that your inability to pay your student loans is unlikely to change.
The second prong in the Brunner Test requires that the court determine if the state of affairs the debtor is currently enduring is likely to persist for a significant portion of the "repayment period." Brunner, 46 B.R. at 756. The test does not require "that additional circumstances be 'exceptional' in the sense that the debtor must prove a 'serious illness, psychiatric problems, disability of a dependent, or something which makes the debtor's circumstances more compelling than that of an ordinary person in debt.' " In re Mandighomi, 242 F. App'x 401, 403 (9th Cir. 2007) (quoting Nys v. Educ. Credit Mgmt. Corp. 308 B.R. 436, 444 (9th Cir. BAP 2004)). A bankruptcy court has the discretion to grant a partial discharge of student loan debt even when the debtor's earning capacity is expected to improve, if that improvement will be insufficient for the debtor to pay the full balance due without an undue hardship. In re Carnduff, 367 B.R. 120, 131 (B.A.P. 9th Cir. 2007). Usually, debtors need to show that they are disabled or hindered in some way that will prevent them from increasing their income for the duration of the loan payment time.

Element 3: You have to show that you've made good efforts to repay your student loans.
The third prong of the Brunner test requires that the debtor show that she has made "good faith efforts to repay the loans." Brunner, 831 F.2d at 396. Two common factors to be considered in evaluating good faith are the debtor's efforts (1) to obtain employment, maximize income, and minimize expenses, and (2) to negotiate a repayment plan. In re Mason, 315 B.R. 554, 563 (B.A.P. 9th Cir. 2004). "[T]he mere failure to make minimal payments on a student loan does not prevent a finding of good faith where the debtor never had the resources to make payments." In re Brown, 239 B.R. at 209 (Quoting Clevenger v. Nebraska Student Loan Program, 212 B.R. 139, 146 (Bankr.W.D.Mo.1997)). In Brown the Court found good faith even where the debtor did not make a single payment, because the debtor lived frugally. Id. at 209. The more efforts you have made to pay your loan, the more inclined a court will be to hold that you had good faith.

If you or anyone you know is having extreme difficulty paying their student loans, contact The McMillan Law Group today at (858) 499-8954.

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