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Is Denial Of Student Loan Debt Under Section 523(a)(8) Of The Bankruptcy Code An “All-Or-Nothing” Proposition?

Not necessarily.  In a recent decision out of the US District Court for the District of Kansas, Educational Credit Management Corporation v. Metz, the District Court upheld a bankruptcy court’s decision to authorize discharge of interest on a student loan while leaving principal intact.  Section 523(a)(8) requires a showing of undue hardship by the Debtor to discharge student loan indebtedness.  The District Court held that this is not an “all-or-nothing” proposition.  Interest on the loan may itself be an imposition, while the Debtor may be able to pay the principal indebtedness.

 In summary, the Debtor was an attractive candidate for the discharge of student loans. She was a 59-year-old, single woman with no dependents. Her annual income had steadily ranged between $40,000 and $43,000, and there was no evidence that she would be able to increase her income or decrease her expenses. She borrowed $16,613.73 between 1989-91 to attend college. She paid approximately $14,000 toward the loans, but because these payments did not cover the interest her balance on these loans grew to $67,000.

 The Debtor did not participate in a payment plan offered by the government but had contemplated them. The one plan she would be able to afford would not pay down the interest and leave her with a tax liability after she retired. The court found that this was at odds with the “fresh start” principle of the Bankruptcy Code.

 In discharging the accrued interest and rejecting the all-or nothing approach the court said the position was supported by the 10th Circuit. The Circuit stated in dicta that the bankruptcy court’s equitable powers allow the court to grant a partial discharge of student loan debt upon a finding of undue hardship. In re Alderete, 412 F .3d. 1200, 1207 (10th Cir. 2005).

 Authored by: Robert Loughran, Law Clerk

Melissa Ditto