Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Sunday, May 29, 2016



My friend and fellow student loan informationalist, Wm. Richard Fossey, emailed me to share a recent undue hardship victory which I want to discuss this week. The case was decided on May 3rd, 2016, in the U.S. Bankruptcy Court in the District of Idaho.  The link to the full context of the decision is here:

The plaintiff, a 43 year old twice divorced mother of a 23 year old and a 15 year old, proved undue hardship under the three-pronged Brunner Test. The plaintiff passed the first prong in spite of having a seemingly modest income and being employed, because her monthly expenses were consistently higher than her monthly income, which satisfied prong one which requires: "Based on current income and expenses, the Debtor cannot maintain a minimal standard of living if forced to repay the student loans".

Prong two of Brunner requires "additional circumstances,indicating that the first prong circumstances will persist through a significant portion of the loan repayment period" in this case the additional circumstances involved the plaintiff's health, and a large portion of the case summary by Judge Pappas was spent on discussing the testimony of a number of Doctor's regarding the health conditions of the plaintiff.  

The defendants here, the Department of Education and ECMC (Educational Credit Management Corp.) went to the level of bringing in "expert witnesses" (a Doctor paid to examine and then testify) to challenge the testimony of the plaintiff's doctors (plural - due to her difficult to diagnose conditions).

In spite of the challenge to dis-prove the plaintiff's "additional circumstances" Judge Pappas found for the plaintiff in prong two.   Pappas summed up prong two this way: "the opinions offered by the experts leads the Court to find that Plaintiff’s medical issues are indeed serious and likely of a permanent nature. Because of that, Plaintiff’s medical and other expenses are likely to remain elevated, and her earnings capacity will likely remain limited.

With two of the Brunner prongs satisfied, the third prong "a demonstration of good faith" or as stated in Brunner: "The debtor has made good faith efforts to repay the loan" , was the final step requiring passage.  Here the court's examination of the plaintiffs "good faith" resulted in opening the door for "a partial discharge".


Judge Pappas agreed with the plaintiff's claims "that she has acted in good faith in this case by trying to maximize, or at least to maintain her income, as well as by endeavoring to minimize her expenses". However, ECMC argued that some of the financial decisions made by the plaintiff demonstrated lack of good faith.  ECMC pointing out expenditures the plaintiff made for an overseas trip (for which she had borrowed money from her mother), and the purchase of a $10,000 Motor Cycle for one of her ex-husbands.

In the end, Judge Pappas concluded that although the plaintiff  "occasionally made bad financial choices (those) should not disqualify her from securing relief"... Yet based on the fact that the plaintiff's lack of financial discipline may have consumed $10,000 that would have otherwise been available to pay on her loans, Judge Pappas moved to not allow a full discharge of the total loan amount.  


While Judge Pappas ruled in favor of the plaintiff's proof of the three prongs of the Brunner Test, he made the decision to grant a partial discharge, stating: "the Code accommodates situations like this one.  The discharge of student loans is not an all or nothing proposition".

Pappas based his decision on precedent case law within Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168, 1173 (9th Cir. 2003), and Jorgensen, 479 B.R. at 86, along with Bossardet v. Educ. Credit Mgmt. Corp. (In re Bossardet), 336 B.R. 451, 457 (Bankr. D. Ariz. 2005). 

Daniel Gill, writer for the Bankruptcy Law Reporter, summarized the decision very well by writing: "Rather than use these improper spending instances as examples of bad faith, the court exercised its inherent powers of equity and carved out such expenditures from the amount of student loans it would order to be dischargeable. Importantly, the court concluded that these poor decisions of the debtor did not materially affect the bottom line of the debtor's reasonable expenses. 

Ultimately, the court ordered that the debtor's foolish or poor financial decisions did not value more than $10,000, so the creditor would hold a non-dischargeable claim for $10,000, plus interest at the contract rate; the remainder of the approximately $93,000 student loan would be discharged."  Source:

My summation is this...  I find that the courts are continuing to struggle with how to rule on undue hardship in a consistent manner when they are constrained by the confines of the now antiquated Brunner Test, and must continue to examine each "prong" on its merits, and then determine if the plaintiff passes all three before granting a discharge.
In this case I agree with the sound decision of Judge Pappas to "splitting the baby" as writer Gill called it. To those of you reading this, take caution, your spending habits may be reason enough to not win a full discharge.

The Honorable Judge Jim Pappas is best know for his precedent case Roth vs ECMC, and he has been very critical of the Brunner Test for many years. Unfortunately the test remains to be proven.  But as I demonstrated in my own successful discharge of $130,000 in February 2016, it is not impossible.

Friday, May 13, 2016



From Wikipedia, the free encyclopedia
Lemon laws are American state laws that provide a remedy for purchasers of cars and other consumer goods in order to compensate for products that repeatedly fail to meet standards of quality and performance. Although there may be defective products of all sorts ranging from small electrical appliances to huge pieces of machinery, the term "lemon" is generally thought of as applying to defective vehicles such as automobilestrucksSUVs, and motorcycles.
These vehicles and other goods are called "lemons". The federal lemon law (the Magnuson-Moss Warranty Act) was enacted in 1975 and protects citizens of all states. State lemon laws vary by state and may not necessarily cover used or leased cars, and other goods. The rights afforded to consumers by lemon laws may exceed the warranties expressed in purchase contracts. Lemon law is the common nickname for these laws, but each state has different names for the laws and acts.
There are two types of warranties. Express warranties are usually statements in writing such as those provided by the manufacturers in owner's manuals and other written sales or advertising materials, or by a sample or model. Implied warranties are broader in scope and assure consumers that the retail product would meet certain minimum standards of quality whereby the product is fit for use for the purpose intended. In each type the manufacturer assumes the liability and responsibility to correct the defect or to repurchase or replace the product. Typically, the existence, scope and consequence of express and implied warranties is a matter of state law, usually covered by Article II of the Uniform Commercial Code.
Federal lemon laws cover anything mechanical. The federal lemon law also provides that the warranter may be obligated to pay the prevailing party's attorney in a successful lemon law suit, as do most state lemon laws.


My good friend and fellow student loan blogger and published author, Professor W. Richard Fossey made a good point in his most recent blog where he stated: "... as everyone knows, the colleges and universities are charging more than their degree programs are worth and are often admitting far more students than the job market can absorb. This is particularly evident at the law schools, which are graduating about two new J.D.s for every job opening.  But it is also true in the field of education...." (emphasis added)


Fossey provided another striking point: "The universities are not penalized for charging too much for their programs or for admitting too many students. And state legislatures are not penalized for establishing more degree programs than the public needs. For example, Arthur Levine, in a scathing report on educational administration programs, estimated that more than half of them should be closed.


So there we have it... Colleges and educators alike over-selling college programs at the highest cost ever for tuition, with CEO's of both Public and Private Colleges making million dollar salaries while pushing the promise of a great job by becoming an "Alum".

Here is where a "Lemon Law" for getting a bad deal on your college degree program promises should come into play.  A Lemon Law for college loan holders could be something like this.... 

FIRST: If the graduate fails to get a job that they trained for within 12 months of graduating, they should not be forced to begin paying on the student loan debt for an additional 12 months, and the interest rate is zero and there would be no penalties for that 24 month period.

SECOND: If the graduate still is unable to obtain employment within their degree field after 36 months, then the student loan debt would be absorbed by the college or university, as part of the College Degree Lemon Law.  No penalties, no interest, no student loan debt!



This week I did a slight diversion from my blog topic on informing on bankruptcy and adversary proceeding....  I will try and get back to that in the next post.  But today I just had this thought hit me and had to write about it.  I was oversold on my education, and ended up not finding employment in my degree field, then ended up owing nearly $130,000.00 for a degree that I was told by educators was going to get me a great job with excellent pay.  It never happened!  My only escape clause came after 27 years of trying to pay back my student loan, when I finally filed bankruptcy and won a full discharge of my student loan under the "Undue Hardship Clause".  If there was a lemon law for colleges, perhaps me and many other graduates would have proven there were bad products being pushed on us? 


W. Richard Fossey: "Educational Credit Management Corporation v. Acosta-Conniff; A lifetime of Indebtedness is the future for most college borrowers" Accessible at:

Arthur Levine. Educating School Leaders. Education Schools Project, 2005. Accessible at