Monday, August 4, 2008
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Court Eases Discharge Requirements for Student Loans
By STEVEN M. ELLIS, Staff Writer
Chapter 13 debtors do not have to complete their bankruptcy plan before seeking to determine whether student loan debts may be discharged due to “undue hardship,” the Ninth U.S. Circuit Court of Appeals ruled Friday.
Taking sides in a split between federal appellate courts, a panel of the court ruled unanimously that such claims are ripe for determination even “substantially in advance of plan completion.”
Cathy Coleman petitioned for wageearner relief under Bankruptcy Code Chapter 13 in 2004 in the Northern District of California, and a bankruptcy judge subsequently confirmed a five-year repayment plan.
Debtors who seek Chapter 13 relief commit to a three- to five-year period of repayment, after which their remaining debts are generally discharged, so long as the debtors comply with the plan’s terms.
However, the code provides that student loans are not included in a discharge unless the debtor brings a separate action under 11 U.S.C. § 523(a)(8) and shows that continued enforcement would constitute undue hardship.
Undue Hardship
To do so, a debtor must demonstrate that he or she cannot maintain a “minimal” standard of living if forced to repay the loans, that circumstances indicate the state of affairs will continue over the course of the loans’ repayment period, and that the debtor previously made a good faith effort at repayment.
At the time of her bankruptcy filing, Coleman owed over $100,000 in student loans to Education Credit, but had been only irregularly employed as a substitute teacher and art teacher after graduating from college.
After being laid off in the year following her plan’s confirmation, she sought to include her student loans debts in the discharge that would issue when she completed her plan.
Education Credit moved to dismiss for lack of subject matter jurisdiction, arguing that Coleman’s claim was not ripe because she could not obtain a discharge until she completed the plan.
The bankruptcy court, declining to determine the merits until discharge was imminent, denied Education Credit’s motion in a decision affirmed by the district court, and the Ninth Circuit, on appeal, agreed.
Judge Michael Daly Hawkins explained that the case was ripe for determination under constitutional considerations because a “substantial controversy” between Coleman and the lender existed as to a specific and defined debt.
Prudential Considerations
Joining the Ninth’s Circuit’s Bankruptcy Appellate Panel and the Fourth Circuit, he also opined that the case was ripe under the test for prudential considerations set forth by the U.S. Supreme Court in Abbott Labs. v. Gardner (1967) 387 U.S. 136, which was later overruled on other grounds.
In Abbott, the Supreme Court developed a two-part test focusing on “the fitness of the issues for judicial decision” and “the hardship to the parties of withholding court consideration.”
Writing that the case was fit for decision, Hawkins noted that “[t]he undue hardship inquiry itself contemplates factual contingencies many years into the future…,” and added that determining a lack of ripeness based on the factual contingency of the debtor’s financial situation “makes little sense since the court must always speculate on debtor’s financial situation years into the future.”
He similarly concluded that postponing the decision on ripeness would present hardship to Coleman, who had hoped to pay counsel for representing her in the dischargeability action through payments into her chapter 13 plan.
Noting that Coleman would otherwise have to pursue the litigation pro se while still being burdened with the obligations until she prevailed, Hawkins said such a result would frustrate the fundamental purpose behind the bankruptcy system of allowing debtors a fresh start.
“Prudential ripeness considerations do not warrant taking the undue hardship determination away from the bankruptcy court at the time when its resolution may be integral to successful completion of the plan,” he wrote.
Judge Diarmuid F. O’Scannlain and U.S. District Judge James V. Selna of the Central District of California, sitting by designation, joined Hawkins in his opinion.
The case is In re Coleman, 06-16477.
Copyright 2008, Metropolitan News Company