In late April, we reported on a high-profile student loan bankruptcy case in Illinois before the 7th Circuit Court of Appeals. The court reversed a lower court’s decision that found the debtor had failed to show that her debts constituted an “undue hardship” by pointing out the debtor was “destitute.” Nevada isn’t in the 7th Circuit, so the ruling had no direct impact on any Las Vegas bankruptcy cases. However, recently, a 9th Circuit Bankruptcy Appellate Panel (BAP) decided on a similar case, which may have positive implications for student loan debtors. Here are six reasons to be optimistic after Roth v. Education Credit Management Corporation (PDF).
- The debtor, Janet Roth, took out 13 federally guaranteed loans and five federal direct loans between 1989 and 1995. She made no voluntary payments on the guaranteed loans, and her wages were garnished and her tax refunds withheld as a result. Roth defaulted on the guaranteed loans between 1998 and 2001. She wisely tried to obtain forbearances on the loans, but she never heard back from the lender and never followed up. By the time she filed bankruptcy she suffered from numerous medical conditions that make it difficult for her to work. Other debtors in similar situations as Roth might be able to find relief from their student loans by filing bankruptcy.
- Although her guaranteed loans had grown to more than $95,000, it should be noted that Roth was able to obtain an administrative discharge of her federal direct loans. It’s important for debtors to know that this option is available, and it’s easier to use thanks to changes the Obama administration has made to the administrative discharge regulations.
- Roth took the risk of forgoing a disability discharge of her guaranteed loans when offered in favor of bankruptcy. It worked in her favor, and the lesson for Las Vegas debtors is that they don’t need to show total and permanent disability to discharge their student loans.
- Roth also declined to consolidate her guaranteed loans and go onto the Income-Based Repayment (IBR) plan because she believed that option would be open to her if she couldn’t discharge her loans in chapter 7 bankruptcy. Again, it’s important for debtors to know that they can strategize over using the federal repayment plans, administrative discharge, and bankruptcy to their advantage.
- The bankruptcy court sympathized with Roth, but it found that according to 9th Circuit precedent, she was not entitled to a discharge because of her lack of voluntary payments on the loans, seek a disability discharge, or negotiate on her loans. The BAP disagreed because Roth did not have the “financial wherewithal” to make any payments, and it would be unlikely that even if she signed on to IBR, she would never make any payments anyway. Debtors in similar circumstances should take note.
- Finally, one of the bankruptcy judges on the BAP filed a concurrence criticizing the 9th circuit’s test for determining if a debtor’s circumstances constitute an “undue hardship” making his or her student loans nondischargeable. The judge argued that because the “undue hardship” language was first placed into the bankruptcy code when it was subject to a five-year time limit, the tests used to interpret it “no longer reflect reality,” and instead, the 9th circuit should switch from a three-prong test to a “totality of the circumstances” test.
With any luck, the 9th circuit will relax its interpretation of the “undue hardship” standard in the bankruptcy code, which will make things easier for Las Vegas debtors. If your situation is similar to Janet Roth’s, bankruptcy might be available to you.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-803-9251 to set up your free consultation.