January 20, 2020

How Chapter 7 Can Help You Pay Your Non-dischargeable Student Loans

It seems to me that the reasons for denying bankruptcy relief to student loan debtors is as much political as anything else.  In my view, Congress ought to return to the “allow discharge if loan came due 7 years or more prior to filing” standard.

Using Chapter 7 to Facilitate Payment of Student Loan Debt

Recently, however, I represented a debtor who did use Chapter 7 indirectly to help deal with his student loan.  We did have a potential complication but ultimately my client got his discharge.  Here is what happened:

My client attended a very fine private  university for both undergraduate and graduate school.   When he left school his student loans totaled close to $250,000.  After graduation he was hired by a large company where he was paid a substantial salary and he was able to pay his student loans without much trouble.

Unfortunately, along with the nice salary my client also got a little to friendly with credit cards.  After 10 years, he had built up an unpaid balance of close to $100,000.   He was also driving an expensive luxury car and he was paying the mortgage on two homes – the first was his original “starter” home and the second was his current residence.   He salary was enough to cover the mortgage payments, the car payment, the student loan payments and the minimum payments on the credit cards.

About a year and a half prior to calling me, my client admitted himself into a substance abuse program where he stayed for over a month getting himself sober.   Unfortunately as a result of the substance abuse problem my client had received several poor reviews at his job and, when he left for six weeks, he lost his job.  When he got out of his program, he discovered that his poor performance issues had cost him his reputation and he was not (and still has not) been able to find a job commiserate with his education.

At the time we filed, he was working at an entry level position in his industry, earning $12 per hour.   Both of his homes were in foreclosure, his car had been repossessed (resulting in a $30,000+ deficiency lawsuit) and his credit card lenders had increased his interest rate and were calling him day and night.

We filed Chapter 7 and because of his wife’s income, their household income was over median, meaning that we had to complete a means test.  The means test currently does not include a line item for student loan debt – instead I put the student loan debt as a “special circumstance” debt.   Without the student loan payment, my client and his wife would fail the means test and would not qualify for Chapter 7.

The United States trustee filed an objection to my means test, arguing that the student loan debt should not be considered a “special circumstance.”  My client, his spouse and I appeared at a deposition with an attorney for the United States trustee where we had to submit receipts and proof of just about every line item of expense that we claimed.

I spoke to the attorney for the United States trustee after the deposition and he agreed that the expense items we claimed on our budget were reasonable and that the only issue was this – could a debtor who was underemployed as a result of voluntary activities (i.e. his substance abuse) claim his student loan debt as allowable deduction on his means test?  The trustee was especially concerned with the thought that at some point in the next five to ten years my client would be able leverage his education into another high paying job.

After about a week of waiting, the attorney for the  U.S. Trustee called me to say that his office was not going to pursue its objection but he made it clear to me that for future cases, the U.S. Trustee would consider on a case by case basis any student loan expense claim on a means test.

In this case, we were able to discharge well over $100,000 of credit card debt, medical debt and repossession deficiency, meaning that my client can now use his disposable income to pay down his student loan debt.   The burden will therefore fall upon him to minimize his household expenses and use every spare dime to pay off his student loans.  Although we could not use bankruptcy to discharge any of the student loan debt we did use it to pare down other obligations and put my client in a position to deal with this forever student loan debt.

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About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

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