Thursday, April 25, 2013

7th Circuit OKs Student Loan Discharge For Bankrupt Debtor; Failure To Score Employment Related To Her Financed Paralegal Education Despite Filing 200 Job Applications Established "Undue Hardship" Needed To Ditch Debt

From a client information release from the law firm Goodwin Proctor LLP:

  • The United States Court of Appeals for the Seventh Circuit ruled that a borrower can discharge her student loans under the bankruptcy code. Generally, the bankruptcy code prevents discharge of student loan debt unless the debtor shows that requiring her to repay the loan constitutes "undue hardship."

    The bankruptcy court ruled that the debtor who incurred student loans to finance her paralegal education showed "undue hardship"—she applied for over 200 jobs over a 10-year period without success, after which she moved to a rural area with few jobs available to live with her retired mother. The student loan servicer appealed arguing that the debtor had failed to diligently search for work and that she did not apply to any non-paralegal jobs. The district court agreed and reversed.

    In deciding to reverse the district court's ruling and reinstate the bankruptcy court's ruling, the Court started by recognizing that the bankruptcy code did not strictly forbid discharge of student loan debt—as the code does for crime- or fraud-related debts—but instead allowed discharge upon a showing of hardship.

    The Court agreed with the bankruptcy court in concluding that the debtor's situation was "hopeless"—a burden, according to the Court, "more restrictive than the statutory [showing of,] undue hardship."

    Finding there was no basis to reverse the bankruptcy court's discretionary determination that the debtor showed no ability to pay, and no realistic chance of ever repaying the debt despite her good-faith efforts, the Court reinstated the bankruptcy court's ruling and held that the debtor's educational debt was dischargeable.

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