Discharging Student Loans and HEAL Student Loans With Bankruptcy

Congress has looked increasingly with disfavor on the discharge of student loans in bankruptcy and has progressively stopped its availability. The presumption of non-dischargeability of student loans reflects the view that student loans are “enabling loans” allowing individuals to improve their own human capital and increase their income potential, but the fruits of the student loans (i.e., the education) cannot be garnished or repossess in case of default.

Limitations on the dischargeability of student loans serve two purposes:
(1) “preventing abuses of the educational loan system by restricting the ability to discharge a student loan shortly after a student’s graduation,” and
(2) “safeguarding the financial integrity of governmental entities and nonprofit institutions that participate in educational loan programs.

In 1998, Congress amended section 523 of the Bankruptcy Code to its current form, eliminating the option for student loan to be discharge after seven years. Now under current Bankruptcy Rules, the debtor must prove the elements of “undue hardship” in an adversary proceeding to have student loans discharged. An adversary proceeding is a sub-part of a bankruptcy case that has all the trappings of civil litigation. To initiate an adversary proceeding, a debtor must fulfill the highly specific service of process requirements. First, the debtor must file a complaint, which must be served alongside a summons on the creditor-defendant. Where the creditor is a corporation, service of the complaint requires a summons delivered upon “an officer, a managing or general agent, or to any agent authorized by appointment or by law to receive service of process. The obligation to answer the adversary proceeding complaint is not triggered until the complaint is “duly served. Once duly served, the creditor-defendant has thirty days to file its answer and thirty-five days if the creditor is the United States. Without proper service, the defendant cannot be said to have “failed to plead or otherwise defend as provided by the rules.

To prove “undue hardship,” the debtor must establish three elements:
(1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living if forced to repay the loans;
(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period.
(3) Finally, debtors typically must prove that they have made good faith efforts to repay their student loan debt before filing bankruptcy.

There are some student loans that this “undue hardship” standard does not apply. One such loan is a HEAL loan. HEAL Student Loan stands for “Health Education Assistance Loan” and it is designed for those wanting to study health related topics such as chiropody, health admin and psychology.

In contrast to the 523 loans, the discharge of the HEAL loan is governed by the unconscionability standard at title 42 U.S.C.section 292f(g): Notwithstanding any other provision of Federal or State law, a debt that is a loan insured under the [HEAL loan program] may be released by a discharge in bankruptcy under any chapter of Title 11, only if such discharge is granted –

(1) after the expiration of the seven-year period beginning on the first date when repayment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended;

(2) upon a finding by the Bankruptcy Court that the nondischarge of such debt would be unconscionable; and

(3) upon the condition that the Secretary shall not have waived the Secretary’s rights to apply subsection (f) of this section to the borrower and the discharged debt.

In requiring that HEAL loans may only be discharged when “the nondischarge of such debt would be unconscionable,” Congress did not provide a definition of unconscionability. 42 U.S.C. section 292f(g). Court interpreting this statute have applied the Supreme Court’s maxim that “[i]n the absence of an indication to the contrary, words in a statute are assumed to bear their `ordinary, contemporary, common meaning.'”As such, “unconscionable” has been defined as “excessive,” “exorbitant,” “lying outside the limits of what is reasonable or acceptable,” “shockingly unfair, harsh, or unjust,” or “outrageous. It is apparent that a single test cannot reasonably take into account all of the considerations relevant to a determination of unconscionability in every case. Thus, most bankruptcy courts will examine the totality of the facts and circumstances surrounding the debtor and the obligation to determine whether non-discharge of the obligation would be unconscionable.

Factors which bankruptcy courts have recognized as relevant in this analysis include

(1) the debtor’s “income, earning ability, health, educational background, dependents, age, accumulated wealth, and professional degree,” In re Rice, 78 F.3d at 1149;

(2) the debtor’s “claimed expenses and standard of living, with a view toward ascertaining whether the debtor has attempted to minimize the expenses of himself and his dependents,” id.;

(3) whether the debtor’s “current situation is likely to continue or improve,” including “whether the debtor has attempted to maximize his income by seeking or obtaining stable employment commensurate with his educational background and abilities,” and “whether the debtor is capable of supplementing his income through secondary part-time or seasonal employment,” even if already employed full time, id.;

(4) whether the debtor’s dependents “are, or could be, contributing financially to their own support,” id.;

(5) the amount of the debt and the rate at which interest accrues, id.; and finally,

(6) the debtor’s “good faith,” i.e. his role in allowing the debt to accrue including “previous efforts to repay the HEAL obligation, including the debtor’s financial situation over the course of time when payments were due; the debtor’s voluntary undertaking of additional financial burdens despite his knowledge of his outstanding HEAL debt; and the percentage of the debtor’s total indebtedness represented by student loans,” id. This list, of course, is not exclusive.

The point that should be gleaned from this article is don’t just automatically assume that a student loan is not dischargeable in bankruptcy. Always check with a competent Bankruptcy Attorney. Your facts and circumstances may justify requesting that the Bankruptcy Court discharge your student loan.