Is Administrative Discharge of Student Loans Available in Bankruptcy?

30 Jun Is Administrative Discharge of Student Loans Available in Bankruptcy?

Administrative standards for discharge of a trade schoolstudentloanare not available in a bankruptcy case according to the United States Bankruptcy Court for the Northern District of Ohio in the case of Gregory v. U.S. Department of Education (April 1, 2008), which ruled that the requirement of undue hardship must always apply to the discharge of student loans in bankruptcy. The court then used the potential availability of a closed-school administrative discharge under 34 C.F.R. 682.402(d) as one reason for denying a hardship discharge for which the debtor qualified under two of the three prongs of the Brunner test .

The record of this case suggests thatthe debtorrepeatedly informed the Department of Education and its collection agents that the school had closed before she completed the program, but was never provided with information on how to apply for an administrative discharge. The opinion is also silent as to whether such information was provided to the debtor or her attorney when the Department of Education filed its proof of claim in the Bankruptcy case.

Gregory illustrates many of the uglier aspects of student loan debt in America.The debtorincurred $4000 in government guaranteed student loans in 1988 to attend the Cleveland Institute of Technology, a private trade school. According to her testimony the school effectively closed while she was still in attendance; it was officially closed as of 1990. In 1995 she consolidated the loans through the William D. Ford Direct loan program. As of 2007, the balance owed on this loan was $17,617.

The Gregorys filed for bankruptcy whenthe Ms. Gregorywas laid off from a state job. Although she found alternative full-time employment, the couple, who have a four year old child, experienced a substantial drop in income. Their combined annual income, with both parents working full time, is $37,512, which represents 65% of Ohio median income for a family of three, and the budget they submitted with their Chapter 7 bankruptcy scedules showed a $400/month shortfall.

In refusing a hardship discharge, the court argued that the debtor had not met the good faith effort to repay the loan, as required by the Brunner test, because she had not enrolled in an income-contingent repayment plan (ICRP) in 1995. Her reasons for notparticipating in this program included possible tax consequences and her belief that she had been the victim of fraud by a school which effectively closed before she could complete her program. At the time, ICRP payments would have been $77 a month, and the court used this figure, coupled with Gregory’s statement that she thought she could come up with $50 a month toward repayment of the debt, as evidence that an ICRP would be affordable.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.

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