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Is a judgment based on a defaulted private student loan dischargable in a Chapter 7 bankruptcy?

Los Angeles, CA |

I lost my job a year ago and defaulted on my private student loan about 4 months ago. They are demanding payment of the entire outstanding balance in 10 days and they threaten to sue me. If they sue me and win a judgment, can that be discharged in a Chapter 7 bankruptcy? Help please!

Attorney Answers 6

Posted

I respecfully disagree with both Mr. Fenn and Mr. Oney. There definitely are circumstances under which a Chapter 7 discharge extends to private student loans. To be non-dischargable a loan must meet specific certain requirements of the Internal Revenue Code. This argument comes straight out off the Bankruptcy Code at section 523(a)(8). Creditors are understandably very prone to claiming tan expansive sweep of "student loan" non-dischargability, but debtors have rights under the law creditors like to disregard.

I have just successfully confirmed discharge of loans made to a student with an aggregate balance of over $40,000 on that argument (although counsel for the defendant failed to challenge me on certain points). It is a myth far too prevalent among otherwise excellent bankrtupcy attorneys that student loans can never be discharged. The key is knowing whether the obligation qualifies as an "educational loan" within the meaning of the Bankruptcy Code.

Your search for an attorney willing to take on this challenge may have to be extensive. My own clients told me after we won that several other attorneys had refused their case because it was impossible.

I offer this information as a public service. I am not licensed to practice law in California, but in the event that you are able to interest an experienced bankruptcy attorney in pursuing this discharge, you may invite you attorney to contact me for further information, pleadings forms, and research resources for a successful adversary action.

Best wishes for a favorable outcome, and please remember to designate a best answer.

This answer is offered as a public service for general information only and may not be relied upon as legal advice.

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37 comments

Brian Campbell Fenn

Brian Campbell Fenn

Posted

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

Posted

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

Posted

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

Posted

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.

Michael John Harrington

Michael John Harrington

Posted

Only attorneys licensed in the state of California who maintain an office in the state can practice law in this state or give legal advice about the laws of the state of California. www.calbar.org

Hermin A. Dowe

Hermin A. Dowe

Posted

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

Posted

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

Posted

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

Posted

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

Posted

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

Posted

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

Posted

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

Posted

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.

Michael John Harrington

Michael John Harrington

Posted

Even when Federal Law or Federal court is involved, federal courts have districts within states and appellate courts have circuits, Calif is in the 9th Cir. ; further legal advice can only be given by attorneys licensed in the state where the case is being heard, whether that be a state or federal court. To say one is giving legal advice them insert a foot note disclaimer that says "not really " is disingenuous and misleading. Perhaps such a statement could be put in the very first sentence so the reader understands the very general discussion that will follow and take it for what its worth, a general discussion and not legal advice. Maybe something they can bring up with their CALIFORNIA LICENSED ATTORNEY IN A LAW OFFICE IN CALIFORNIA hopefully a certified bankruptcy specialist approved by the STATE BAR OF CALIFORNIA. note I dont,ever want to hear how an out state attorney called up a California resident, offered legal help, then abused them and called them names here on avvo dot com , whether the version of events is true or not, I personally saw the name calling posted on avvo by an attorney against an avvo user, a California resident seeking help and abused on avvo by an out of state attorney. I will continue to post information in my byline where people who feel they may have been abused by an attorney can call, whether or not it turns out they were or were not treated wrongly, California has strong consumer protection laws and California attorneys have strict duties that must adhere to. Now run to Joshua king, avvo corp attorney and flag me again.

Michael John Harrington

Michael John Harrington

Posted

My by line referring to calbar dot org is by no means directed at any particular attorney, why one attorney out of 10000000s would come forward and claim they feel intimidated is beyond me and very interesting. Nonetheless the fact remains we have a state bar that regulates the practice of law and protects consumers. This should not intimidate any attorney. This is an important protection and resource for consumers and attorneys should be happy to make the information available to the public.

Paula Brown Sinclair

Paula Brown Sinclair

Posted

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

Posted

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?

Michael John Harrington

Michael John Harrington

Posted

I posted on many many non- California attorneys who answered specific legal advice on Calif questions; why you feel guilty is on you dont project it on me please. Consumers have a resource on www.calbar.org this should not intimidate any attorney.

William James Waters

William James Waters

Posted

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

Posted

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.

Asker

Posted

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

Posted

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.

Michael John Harrington

Michael John Harrington

Posted

Sinclair's complaint I am attacking her personally with my byline about California lawyers only can give advice about California law has resulted in her causing me to be permanently banned from avvo, with 20 years of a spotless record practicing law.

Paula Brown Sinclair

Paula Brown Sinclair

Posted

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.

Michael John Harrington

Michael John Harrington

Posted

If you read my profile, you will see im referred to as very honest. As soon as you complained , I was banned within maybe 30 minutes. I cannot answer questions, a banner comes up to say I have been banned due to a violation of terms of service. You are the only person I know who claimed I violated a term of service, going so far as you called my posts "hate speech" just 2 days ago. A horrible false accusation.

Paula Brown Sinclair

Paula Brown Sinclair

Posted

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

Michael John Harrington

Michael John Harrington

Posted

You make false allegations and flag a response, then state the response was taken down because it was an "inappropriate comment" this is rather unbelievable

Michael John Harrington

Michael John Harrington

Posted

Heres an example I found where you claim a user of avvo attacked you, that you flag 100s of postings on avvo of peope who attack you using aliases, whether its true or not I cant say its not my call to make, but you called the avvo user very bas names. Same with me you relentlessly flag me and accuse me , like a vendetta. Read this , because it seems you flag 100s of posts, get them down often , why , I cant say, dont know, but id never want to see a prospective client called these horrible names yet avvo keeps these post up while taking down others so obviously its not based on anyone saying anything wrong. Its just arbitrary. http://www.avvo.com/answers/1708529/comments/new

Judy A. Goldstein

Judy A. Goldstein

Posted

.

Michael John Harrington

Michael John Harrington

Posted

I did not mislead or act disingenuous when I said you accused me of "hate speech", why you persist on publicly attacking me I have no idea. I have well grounded beliefs in the law and ethics which other may reasonably disagree with on finer points, but I dont lie or use hate speech. Heres the exact quote you stated about me , until you finally had me banned while you call avvo users names and give out their full name and city publicly and it remains up while my legal discussion is flagged as hate speech, heres one of your false flags " TOS #18 Community Guidelines reminder: "Avoid posting content that is deliberately hostile, insulting, provocative, bigoted, etc. Personal attacks and hate speech are expressly forbidden."

Michael John Harrington

Michael John Harrington

Posted

Your conduct is completely malicious and bogus, whatever avvo says im sorry we are all attorneys and not stupid, this wont hold up in an impartial forum

Michael John Harrington

Michael John Harrington

Posted

Heres the complete text, unless this is some other lawyer with your name, falsely accusing me of hate speech, flagging me all week , by coincidence when we were both on the top of the points leaderboard, mmmm. Attorney Paula Sinclair has responded to your comment on question: FREE DIVORCE FROM INMATE Comment: TOS #18 Community Guidelines reminder: "Avoid posting content that is deliberately hostile, insulting, provocative, bigoted, etc. Personal attacks and hate speech are expressly forbidden."

Anthony Matthew Vassallo

Anthony Matthew Vassallo

Posted

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

Posted

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. One of the things I like best about the generous time I donate to Avvo is the opportunity to engage in civil discussion and learn more. In gratitude I share what I have come to know in the nost professional manner I can manage. I recommend that attitude to you.

Elliott H Stone

Elliott H Stone

Posted

FLAGGED for violating TOS -- Paula Brown Sinclair is not admitted to the state bar of California and should not be giving legal advice on California law.

Judy A. Goldstein

Judy A. Goldstein

Posted

Mr. Stone - You have resurrected a 4 month old discussion that resulted, among other things, in the removal of an attorney's comments in this and other threads and his ability to participate because of his constant harassing of other attorneys. You can flag whatever you want but the truth remains that licensing in any particular state is not required to respond to questions posed on Avvo. I skimmed the thread again just to refresh my recollection and it appears this is a BK question. I do not do bankruptcy work but the last time I checked, it was federal in nature and even my poor, unlicensed in California, feeble Illinois mind seems to recall that BK is federal work and not in this instance tied to CA licensing. Was there some particular reason that you chose t jump into this fray 4 months after it was closed down?

Paula Brown Sinclair

Paula Brown Sinclair

Posted

Thank you, Avvo, for taking down the inappropriate post of Elliott Stone, to which Ms. Goldstein referred.

Posted

The short answer is 'no.' Student loan debt is virtually impossible to discharge under the currently bankruptcy code. The fact that the debt might change forms from a basic unsecured debt to a judgment does not change the original character of the loan.

Brian C. Fenn <b><a href="http://www.fennlawfirm.com">FENN LAW FIRM</a></b> 29222 Rancho Viejo Rd. Ste. 102 San Juan Capistrano, CA 92675 Tel/Fax: (800) 994-9079 brian@fennlawfirm.com

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Posted

Attorney Fenn is correct. I once took a case up on appeal, arguing that once the student loan creditor obtained a judgment, the student-loan-ness of the debt got wiped out. I lost.

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Posted

I agree with attorney Fenn that any such judgment would not be dischargeable, but would also suggest you look into alternative payment arrangements for the loan. There is a federal government website for the Consumer Financial Protection Bureau that contains a database of student loan information and will help you identify what type of loan you have and what payment arrangements might be available to you, for federally-backed student loans and many private student loans. Options often include payment deferment or forebearance. The web address is:
http://www.consumerfinance.gov/students/repay/
Another option is to contact the lender directly and explain your work & financial situation and ask if they can set you up with a reasonable payment plan or if they can give you a deferment so that you can delay payments until you resume work. Most lenders would rather work out an arrangement with you than sue and obtain a judgment that may not be collectible at this time anyway.
Hope that helps -

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1 comment

Paula Brown Sinclair

Paula Brown Sinclair

Posted

Please, Mr. Waters, review the long response I provided and was apparently keyboarding simlutaneously with your own.

Posted

The best thing to do is see a "certified bankruptcy specialist" in Los Angeles. The county bar charges about $40 to find an attorney for you , or they can waive the fee too. The court in this district offers pro se clinics for free, as well. Attempting to Discharge a student loan is very specialized and difficult area of BK law. While general information can be dispensed to a broad range of people over social media, and good lawyers can be easily previewed over avvo dot com, the next step is to sit down with local, experienced counsel.
Only attorneys licensed in the state of California who maintain an office in the state can practice law in this state . www.calbar.org

The answers on this discussion board are general in nature and NOT intended as legal advice. Responding to questions does not constitute an attorney-client relationship. Always see a lawyer about your individual situation.

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Posted

Student loans are generally non-discargeable in bankruptcy without a finding of "undue hardship." If you file a Chapter 13 the debt will sit in the unsecured pro rata pool with the other unsecured debts and it will either be paid back at a lower percentage or not at all. This will be the equivilant of the 5 year deferment as long as you stay in the Ch 13 plan

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2 comments

Paula Brown Sinclair

Paula Brown Sinclair

Posted

You posted this, Mr. Weil, without reading the comments under my response?

Brad Francis Weil

Brad Francis Weil

Posted

Yes I posed this without reading the debate that follows your comments I recommend a Chapter 13 and I stand by that.

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