The 9th Circuit May Have Made it Easier to Discharge Student Loans in Bankruptcy

I recently did a blog about discharging student loans in bankruptcy. In that blog, I noted a 9th Circuit Bankruptcy Appellate Panel decision in which one of the Panel Judge’s called on the 9th Circuit Court of Appeals to come up with a more workable legal standard for discharging student loans in bankruptcy. Specifically, the Judge felt the Brunner standard the court was using made it too difficult for debtors to discharge student loans, and that with the changes in the student loan landscape since the Brunner decision, a new standard was needed.

Unfortunately, to date, the 9th Circuit Court of Appeals has declined to articulate a new standard in student loan discharge through bankruptcy. However, a recent decision by the court may still be a promising sign. In the case of In re Hedlund, the 9th Circuit was reviewing a decision by a bankruptcy court in which the majority of a Debtor’s student loan debt was deemed dischargeable. The bankruptcy court determined that the debt was dischargeable under the Brunner criteria. Under that standard, in order to discharge a student loan in bankruptcy, a debtor must show: (1) they cannot maintain, based on current income and expenses, a “minimal” standard of living for themself and their dependents if required 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; and (3) the debtor has made good faith efforts to repay the loans.

In application, this standard has been very difficult to meet and often means that debtors are left to their own devices when dealing with student loan creditors. The 9th Circuit did not strike down this standard in the Hedlund case. However, the decision may have loosened the rigidity in the application a bit. Specifically, the Court decided to review the Judge’s determination of the last prong; the “good faith” prong for the more lenient clear error instead of the often fatal de novo standard. The de novo standard means the court reviews the decision without giving any deference to the bankruptcy court’s opinion. In other words, the court will step into the shoes of the bankruptcy court and make a decision based on the law and facts as if it were looking at the case for the first time.

The decision to review the bankruptcy court’s opinion for clear error was beneficial to the debtor, because although the bankruptcy court had found he had made good faith efforts to repay his loans, the District Court reviewing the bankruptcy court’s decision de novo, did not. Using a de novo standard of review, the District Court looked at the facts independently and found the debtor did not make a good faith effort to repay his loans. If the 9th Circuit had also used the de novo standard, the result may have been the same. Instead, the appeals court reviewed the bankruptcy judge’s findings for clear error. Finding no clear error in the bankruptcy court’s analysis of the facts and law, the 9th Circuit upheld the bankruptcy court’s findings and affirmed the discharge of the debtor’s student loan debt.

Although the court did not formulate an easier standard for discharging student loans, it did uphold a more permissive standard of review. This holding will enable bankruptcy judge’s to use more of their own discretion regarding the facts of a debtor’s case, and will hopefully result in more student loan debt being discharged in bankruptcy.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code