Bankruptcy News: Bankruptcy Court Discharges 400K+ of Student Loans
In Koeut v. U.S. Department of Education, California bankruptcy court has allowed a borrower to discharge over $430,000 in student loans.
This is unprecedented as the bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy.
The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests to determine discharge eligibility.
The borrower in the case had taken on substantial student loan debt to go to medical school. However, the borrower was unable to find gainful employment despite good-faith efforts. The borrower filed for bankruptcy and went through an adversary proceeding to try to prove that he met the undue hardship standard. The court ultimately ruled in his favor.
The bankruptcy court concluded that the borrower’s overall student loan debt should be reduced from $440,000 to $8,291.67 and allowed the borrower to pay off the small remaining balance at the rate of $41.87 per month.
Notably, in issuing its decision, the court rejected an argument by the U.S. Department of Education that the borrower should be denied relief because he failed to take advantage of income-driven repayment programs, which can provide affordable payments and eventual loan forgiveness for federal student loan borrowers, even for borrowers with large balances. The court rejected this argument given that the large balance itself was impacting his credit and limiting his employment prospects. The court also noted that there could be significant tax consequences associated with eventual loan forgiveness under an income-driven repayment plan, and this factored into the decision, as well.
Full case citation here: Koeut v. U.S. Department of Edu. (In re Koeut), No. 12-07242-MM7, 2020 Bankr. LEXIS 3416 (Bankr. S.D. Cal. Dec. 4, 2020)
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