By Ryan C. Wood
There continues to be discussion about student loan reform. Unfortunately, Congress and the Senate, as of the writing of this article, have not passed any legislation to help students with their loans. Student loans can be discharged when filing bankruptcy by filing an adversary proceeding and claiming an undue hardship pursuant the 11 U.S.C. §523(a)(8). Ask your bankruptcy lawyer about your circumstances to see if this could be possible for you.
In a recent 9th Circuit Court of Appeals case the court reviews the lower court’s ruling on the good faith prong for clear error. The case is Michael Eric Hedlund v. The Educational Resources Institute Inc. et. al., case number 12-35258. Even more interesting is that the debtor, Michael Eric Hedlund, was a law school graduate who unfortunately did not pass the bar exam after repeated attempts.
Hedlund successfully received a partial discharge of his student loans, all but $32,800. The student loan company then appealed and the district court reviewed the case de novo instead of for clear error. De novo review is a form of review that looks at the case as if the prior trial had not taken place. The 9th Circuit held that the district court should have reviewed the case for clear error instead. The 9th Circuit then held there was no clear error in the original bankruptcy court’s judgment for a partial discharge of Hedlund’s student loans.
The main issue in the case was the 3rd prong of the Bruner Test, good faith effort to repay the loans. Whether someone has made a good faith effort to repay the student loans is more complicated and involves more issues that just making a monthly payment. A thorough conversation with your bankruptcy attorney should be had regarding these issues. Good faith can be measured by student loan holder’s efforts to obtain employment, the type of employment, the level of pay of the employment. The good faith prong also involves the student loan holder expenses. Did they minimize their expenses? Are their expenses for certain things too high given their income? The good faith prong also evaluates whether the student loan holder took advantage of payment plan options of the student loan company.
It was found that Hedlund was maximizing his employment income with his current employment in Klamath Falls. Heldund had also applied to two higher paying jobs. The Court noted that Hedlund had attempted to take the bar exam unsuccessfully three times. Not that passing the bar would have increased his income. Next the Court reviewed Hedlund’s expenses and found that his clothing, recreation and miscellaneous budgets including childcare and haircuts could be reduced.
Again, the District Court reviewed the original trial case de novo and found that Hedlund had not used his best efforts to maximize his income or minimize his expenses. The District Court notably criticized Hedlund for choosing to live as a single-income family, “a lifestyle that few today an afford.” Hedlund v. Educ. Res. Inst. Inc, 468 B.R. 901, 916 (D. Or. 2012). In the end the District Court should have reviewed the good faith prong of the test for clear error. The Ninth Circuit Court of Appeals found there was not clear error in the original bankruptcy court’s judgment to partially discharge Hedlund’s student loans.
