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Challenging Student Loans Years After an Underlying Bankruptcy Case Has Been Closed

Section 523(a)(8) of the Bankruptcy Code provides that a debt arising from:

  1. (a) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or
    (b)  an obligation to repay funds received as an educational benefit, scholarship, or stipend, or
  2. any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual

is exempt from discharge in bankruptcy unless it “would impose an undue hardship on the debtor and the debtor’s dependents.”  11 U.S.C. § 523(a)(8).

In Brunner v New York Life Educ. Servs. Corp. 831 F.2d 395 (2nd Cir. 1987) the Court set down what has been referred to as the "Brunner Test" for proving undue hardship.  The test requires a debtor to prove that: (1) he/she cannot maintain a minimal standard of living if forced to repay the loan(s); (2) it is likely that the situation will persist for a significant portion of the repayment period; and (3) a good faith effort was made to repay the loans.  This test has been adopted in most jurisdiction, including the Fifth Circuit.  The test has not been codified.

In a recent bankruptcy decision, a bankruptcy judge in Albuquerque, New Mexico was confronted with a challenge to the discharge of a student loan even though his underlying chapter 7 bankruptcy case was closed for over six years.  In In re Gimbel, 17-1048 (Bankr. D.N.M. March 8, 2018), the debtor had scheduled approximately $77,000 in student loan debt in his bankruptcy and received a discharge of all other debts in 2011.  The debtor moved to re-open his bankruptcy more than six years later and filed a complaint seeking to discharge his student loan indebtedness under section 553(a)(8) of the Bankruptcy Code.  The lender-defendant moved to dismiss the action on several grounds, including laches – an equitable defense claiming the lawsuit is stale or untimely asserted.  The Court disagreed that six years was too long to wait to seek discharge of student loan indebtedness noting that there “is no deadline expressly imposed by the Code or Rules for filing an adversary proceeding to determine whether a student loan debt should be excepted” from discharge.  Citing authority for the proposition that a debtor may challenge a student loan debt after discharge or the closing of a case, the Court noted that student loans do not fall under section 523(c) of the Bankruptcy Code and, therefore, Bankruptcy Rule 4007(b) applies to the initiation of an action seeking the discharge of student loan debt and provides that such complaints may be filed “at any time.”

Section 523(c) of the Bankruptcy Code provides:

(c)
(1)
Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.
(2)
Paragraph (1) shall not apply in the case of a Federal depository institutions regulatory agency seeking, in its capacity as conservator, receiver, or liquidating agent for an insured depository institution, to recover a debt described in subsection (a)(2), (a)(4), (a)(6), or (a)(11) owed to such institution by an institution-affiliated party unless the receiver, conservator, or liquidating agent was appointed in time to reasonably comply, or for a Federal depository institutions regulatory agency acting in its corporate capacity as a successor to such receiver, conservator, or liquidating agent to reasonably comply, with subsection (a)(3)(B) as a creditor of such institution-affiliated party with respect to such debt

11 U.S.C. § 523(c).  Bankruptcy Rule 4007(b) provides:

(b) Time for Commencing Proceeding Other Than Under §523(c) of the Code. A complaint other than under §523(c) may be filed at any time. A case may be reopened without payment of an additional filing fee for the purpose of filing a complaint to obtain a determination under this rule.

Fed. R. Bankr. P. 7004(b).  In a footnote, the Court intimated that the debtor could not discharge his student loans if he were eligible to file another Chapter 7.  It is uncertain whether this was the case involving the debtor at issue in this action.

Sarah Grace Chastain