POST BAPCPA:

In re Sanborn, (Bkrtcy.D.Mass.) July 11, 2010: Discharge - Single mother suffering from chronic fatigue syndrome was not entitled to "undue hardship" discharge of student loans. Neither a Chapter 7 debtor's medically diagnosed chronic fatigue syndrome/myalgic encephalomyelitis (CFS/ME), which at present prevented her from working and limited her to monthly income of $1,211 in public assistance benefits, nor the fact that she was a single mother charged with the care of a young child entitled the debtor to an "undue hardship" discharge of her $27,674 in student loan debt. Even the debtor's treating physician acknowledged that the debtor's present inability to work would wax and wane, and might perhaps be controlled through the use of drugs that the debtor had declined to take out of concern for the possible side effects. The debtor had obtained a certificate in medical assistance, that qualified her for lucrative employment in a variety of medical settings, and her child would not need as much care as he grew older. Finally, repayment options, such as the income contingent repayment plan (ICRP), provided the debtor with the flexibility needed to deal with what would likely be her changing financial circumstance.

United Student Aid Funds, Inc. v. Espinosa, 559 U.S. ___ (2010) (3/23/10). Supreme Court Refuses to Void Confirmation of Plan Discharging Student Loan

In that case Espinosa (9th Cir), a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan.  He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan.  Although the student loan creditor received actual notice of the plan, it did not object to the partial payment.  The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997.  Several years later, USAF attempted to collect the unpaid interest on the loan.  Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).

The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.”  The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional.  The issue then, was whether USAF received adequate notice to satisfy due process.  The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.

The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power.  Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment.  This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”

The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.

In re Harding, 423 B.R. 568 (Bankr. S.D. Fla. 2010).  It does not allow different classification of the nonpriority student loan, but it issues an injunction against penalties. 

In the Matter of: Coleman, No. 06-16477 U.S. 9th Circuit Court of Appeals, August 01, 2008
"[U]ndue hardship" determinations, whereby bankruptcy courts decide whether student loans qualify for discharge, can be ripe in a Chapter 13 case substantially in advance of plan completion. Since graduating from college, Coleman has been irregularly employed as a substitute teacher and art teacher, and was recently laid off in March of 2005. Just under a year after the plan was confirmed, Coleman sought a determination that it would constitute an undue hardship under 11 U.S.C. § 523(a)(8) for her to repay her student loans, and that her student loans should therefore not be excepted from discharge. Educational Credit moved to dismiss for lack of subject matter jurisdiction on ripeness grounds. The bankruptcy court denied the motion, In re Coleman, 333 B.R. 841 (Bankr. N.D. Cal. 2005), and the district court affirmed the decision of the bankruptcy court.  We affirm.Read more...

WARNING: PRE- BAPCPA:
September 28, 2006 – No. 04-35988 – Educ. Credit Mgmt. Corp. v. Mason
Partial discharge of government-insured student loans is reversed where the debtor had not made a good effort to pay back the loans since he had not maximized his income or made adequate efforts to obtain full-time employment.

Read opinion.

Educ. Credit Mgmt. Corp. v. Mason (09/28/06 - No. 04-35999) (9th Cir.Ct.App)
A bankruptcy panel's reversal of a ruling against a creditor on her adversary complaint in bankruptcy court to have her student loans discharged is affirmed where the bankruptcy court erred in requiring the debtor to show exceptional circumstances beyond the inability to pay in the present and a likely inability to pay in the future.  "Has the Debtor shown that her inability to pay will likely persist throughout a substantial portion of her loans' repayment period?"  [(1)] Serious mental or physical disability of the debtor or the debtor’s dependents which prevents employment or advancement; [(2)] The debtor’s obligations to care for dependents; [(3)] Lack of, or severely limited education; [(4)] Poor quality of education; [(5)] Lack of usable or marketable job skills; [(6)] Underemployment; [(7)] Maximized income potential in the chosen educational field, and no other more lucrative job skills; [(8)] Limited number of years remaining in [the debtor’s] work life to allow payment of the loan; [(9)] Age or other factors that prevent retraining or relocation as a means for payment of the loan; [(10)] Lack of assets, whether or not exempt, which could be used to pay the loan; [(11)] Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor’s assets and/or likely increases in the debtor’s income; [(12)] Lack of better financial options elsewhere. http://caselaw.lp.findlaw.com/data2/circs/9th/0416007p.pdf

Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 753- 55 (Bankr. S.D.N.Y. 1985), The district court had thoroughly analyzed the limited legislative history pertaining to the “undue hardship” requirement.

SAXMAN v. EDUC. CREDIT MGMT. CORP., No. 01-35620 (9th Cir. April 14,     2003)  Bankruptcy courts may partially discharge an educational loan pursuant to their equitable authority under 11 U.S.C. section 105(a).     http://caselaw.lp.findlaw.com/data2/circs/9th/0135620p.pdf

IN RE CHAMBERS (11/04/03 - No. 03-1557) (7th Cir) In a Chapter 7 declaratory judgment action, summary judgment to plaintiff is affirmed where plaintiff's unpaid balance on a student account does not meet the definition of an educational loan under section 523(a)(8) and was therefore properly discharged. http://caselaw.lp.findlaw.com/data2/circs/7th/031557p.pdf

"Accordingly, applying this standard, the bankruptcy court found no evidence of intent by either party to enter into a loan arrangement; rather, the debt arose from Ms. Chambers’ failure to pay the tuition and expenses when due."