Brian Campbell Fenn
Brian Campbell Fenn, Bankruptcy Attorney - San Juan Capistrano, CA
Posted almost 2 years ago.

I stand by what I said. There certainly are exceptions, but the general rule has to be that the vast, vast majority of student loans are not dischargeable under the current code. Also, it appeared that the question revolved around whether by becoming a judgment, the loan would thus become dischargeable.

William James Waters
William James Waters, Bankruptcy Attorney - Simi Valley, CA
Posted almost 2 years ago.

I agree that often many attorneys, myself included, rarely look beyond the mantra that "student loans are not dischargeable," however in California that approach is based on several court decisions where it has been made clear that there is no longer any distinction, as far as dischargeability is concerned, between private and government student loans, and also that in order to be dischargeable, the student must pass several hurdles. One of which is to show that a good-faith attempt has been made to pay the loan (which this persona appears to be able to meet based on the fact that the employment was lost a year ago but the student loan default only ocurred 4 months ago, but the most difficult hurdle, at least as followed by the California courts, is the need to show that having to pay the student loan would create such an undue financial hardship that the student would not be able to maintain at least a minimal standard of living. I have seen that requirement interpreted by the courts to where it is an almost impossible burden to meet. For example, if the student is able to afford even the most basic of living arrangements, then the courts have ruled against discharge. That difficult hurdle and the hard-line approach of the courts has resulted in the near-automatic response that "student loans are not dischargeable." Of course there are always exceptions and it is possible to actually discharge them in certain circumstances, but those are rare cases that are very difficult to succeed at. But, in hindsight, I agree that the conclusion of non-dischargeability in this case may be premature. The question-asker should consult with local bankruptcy counsel to see if by chance the burden of proof regarding the extreme financial hardship might be able to be met and this debt actually be able to be discharged in a bankruptcy. The stated facts are insufficient to reach a conclusion one way or the other, but the odds are certainly against dischargeability, at least in California.

Brian Campbell Fenn
Brian Campbell Fenn, Bankruptcy Attorney - San Juan Capistrano, CA
Posted almost 2 years ago.

Ms. Sinclair, if you're able, would you mind sharing some of the general facts of the case you referenced? It could be helpful to those asking questions as well as other attorneys.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Dischargability, Mr. Waters, is a matter of federal law. There may be cases from California bankrtupcy courts, but I am aware of none that have held against the 523(a)(8)/IRS 221 argument.

Hermin A. Dowe
Hermin A. Dowe, Bankruptcy Attorney - San Pablo, CA
Posted almost 2 years ago.

This is an interesting discussion. Ms. Sinclair, we in California would welcome a chance to review your pleadings and forms. Your experience may allow us to add further value to our service.

William James Waters
William James Waters, Bankruptcy Attorney - Simi Valley, CA
Posted almost 2 years ago.

Ms. Sinclair, I am not saying the California courts "have held against" the 523(a)(8) argument, all I am saying is that in interpreting the "would impose an undue hardship" language of 523(a)(8), the 9th Circuit has interpreted that language very narrowly and has held that if the debtor/student can pay the loan and still maintain even a "minimal" standard of living, then the loan will not be discharged, and the local California BK courts have followed that reasoning. I will try to find the citation(s) for you -

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Relevant facts, Mr. Fenn, include that the loans in question were procured through an internet source, funded by a commercial bank without federal or non-profit involvement, and paid directly to the borrowers, who used the money for a variety of purposes not related to education. IRS regs are clear that to be non-dischargable the loan proceeds must have been used solely for educational purposes (not generally but as specifically itemized in IRS regs). I think this fact pattern is far more common than most bankrtupcy attorneys realize, and it is no longer enough to accept a client's characterization that their obligation is a "student loan." Documentation must be reviewed. I will give you that this is an emerging area of law. Almost all published "student loan" cases in the 9th Circuit and elsewhere focus on the undue hardship issue. I deliberately did not allege undue hardship even after one defendant's attorney suggested I "throw it in."

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

To be clear, Mr. Waters, the argument that succeeded in my cases was unrelated to the "undue hardship" issue. It is based on the original character of the obligation. In my experience the only provable undue hardship cases are more expeditiously handled
through the U.S. Department of Eduation disability payment waiver procedure.

William James Waters
William James Waters, Bankruptcy Attorney - Simi Valley, CA
Posted almost 2 years ago.

Ms. Sinclair, the "undue hardship" 9th Cir. case I was referring to is:
In re: ERNEST J. PENA; JULIE PENA, Debtors, UNITED STUDENT
AID FUNDS, INC., Appellant, v. ERNEST J. PENA; JULIE PENA,
Appellees.
No. 97-16012
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
155 F.3d 1108.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Please, Mr. Harrington, read my disclaimer and note that California law is not involved here. Answering Avvo questions in the manner I do is not the practice of law. I am not the only attorney from outside California that has provided an answer to the instant question. I take exception to the intimidation inferred by your comment, and have flagged it as a violation of terms of service.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Thank you, Mr. Waters. I am quite aware of the rigorous proof required of "undue hardship" cases in the 9th Circuit. (Please see the comment I was apparently simultaneously keyboarding.) My point on the instant question is that there is a viable argument for dischargability of "private student loans" other than "undue hardship." I thought this would be good news for diligent bankruptcy cases.

William James Waters
William James Waters, Bankruptcy Attorney - Simi Valley, CA
Posted almost 2 years ago.

I guess I just don't see how you can even attempt to discharge a student loan without addressing the 3-prong test of Brunner, unless, as you appear to be saying, your argument was that your case involved a loan that really wasn't a student loan since the debtors used the proceeds for non-educational purposes. If that's the case, and your client basically had an unsecured general-purpose loan of some sort, then I agree under those facts it could be dischargeable. I also agree we can't just take a debtor's word for it that it is a "student' loan, but if it really was a student loan, as I suspect it was in the instant matter, then your "not really a student loan" argument wouldn't apply and you would be stuck with having to address the Brunner test, and in California it would be the Brunner test as interpreted by the 9th Circuit in Pena. You then would have no choice but to address the "undue hardship" issue head on. Also, I suspect that in your case, if the terms of the private loan included a condition that the proceeds only be used for educational purposes, and your debtor agreed to those terms but instead used the proceeds for non-educational purposes and then tried to discharge the loan on those grounds, you would not have been successful if the lender challenged the dischargeability on fraud grounds. Either way, that is a fairly narrow fact situation that may or may not even apply to the instant question.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

I comment, Mr. Harrington, because you have posted your comment on several of my answers, but not on the answers of other non-CA attorneys. Your behaviro toward me is personal and unprofessional.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Mr. Waters, I can see that you are struggling to understand my argument, so let me try to help. My analysis does require perfect clarity. It is true that only certain "student" loans are dischargable if the Brunner test is met, but "student loan" is not a term of art. Non-dischargability of "educational loans" under 523(a)(8) is limited to those loans which are "qualified education loans" under IRC 221. Many "private" student loans are not IRC qualified education loans (making 523(a)(8) dischargability limits inapplicable, and are therefore dischargable like any other commercial loan. Am I making any sense now?

William James Waters
William James Waters, Bankruptcy Attorney - Simi Valley, CA
Posted almost 2 years ago.

Yes. I was aparently overlooking the need to add the separate IRC 221(d) requirements into the analysis. Thank you for the clarification. FYI, I also came across an interesting article in another forum that further clarifies this point: http://www.bankruptcylawnetwork.com/student-loans-maybe-they-can-be-discharged-after-all/
However, if the loan in the instant question meets the IRC 221(d) requirements and is in fact a qualified student loan, then all of the earlier responses regarding non-dischargeability would still be applicable.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Yes, Mr. Waters. A loan that is a "qualified education loan" within the meaning of IRC 221(d)(1) would be an "educational loan" within the meaning of 523(a)(8) and only dischargable on the ground of "undue hardship" as set forth in the 9th Cir. by Brunner. I found the sudent loan practice manual published by the National Consumer Law Center to an invaluable resource.

No photo
Asker
Posted almost 2 years ago.

Wow! I didn't expect such a response! I think the loan I was discussing may have been issued directly to me and I may have used it for housing expenses at the time. I must look into it further and discuss it with a local BK lawyer. I am glad that Attorney Sinclair raised this.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

You are welcome, Dear Asker. And you may disregard the comments of Mr. Harrington. Avvo welcomes and encourages all attorneys with knowledge and experience to share to contribute responses to sincere Avvo users such as yourself.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Mr. Harrington is being less than candid about Avvo's action. Nothing I have done or said could be responsible, but his own posts on other questions could explain the result.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Thank you, Avvo, for taking down Mr. harrington's inappropriate comments.

Anthony Matthew Vassallo
Anthony Matthew Vassallo, Chapter 11 Bankruptcy Attorney - Brooklyn, NY
Posted almost 2 years ago.

Ms. Sinclair -- It seems to me your case was so fact-intensive that the lesson to be learned is to make sure one investigates fully the facts underlying the loan, one cannot simply state that all education-related loans are non-dischargebale. Why this truly unique fact pattern you described above is generating is interesting if there exists many other people in similar situations. And while it is unseemly to engage in verbal warfare as apparently was done here, it is just as unseemly to boast about one legal victory ad nauseam and picking fights with other counsel.

Paula Brown Sinclair
Paula Brown Sinclair, Bankruptcy Attorney - Twin Falls, ID
Posted almost 2 years ago.

Mr Vassallo-- I find your criticism harsh and unwarranted. In the past decade many commercial banks considered loans to students to be so bullet-proof under the Bankrtupcy Code that they built huge portfolios of loans the students couldn't possibly afford, then packaged them and sold them to securitized trusts (in the same manner as the mortgage mess), believing themselves protected from default by the Bankrtupcy Code. I do not agree that the facts of my clients' loans were at all unusual. Their loans were very typical of the commercial loan activity at the time and it is a mistake for bankrtupcy attorneys to perpetuate the myth that all "student loans" are non-dischargable.

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