Starting an adversary proceeding to determine discharability of my student loan

[Character711]

How do I start an adversary proceeding to determine dischargability of my student loan in a Chapter 13 BK? I am in Los Angeles jurisdiction What is the process or where can I find the guidelines? Would I be better off filing an Objection to Claim? My student loan became defaulted in January and the guaranty agency slapped $10,000 in penalites since Jan. 2010! What grounds could I state. I actually don't mind paying on the loan, although it does provide hardship. I just want to get rid of all the penalities. HELP

[JackBondLove]

It is virtually impossible to have a student loan discharged. You pretty much need to be legally disabled (and thus eligible for Social Security disability, if you would have enough quarters.) With that said, I do believe that once you bring up student debt to a BK, at least the interest is stopped. (I may be wrong about that.)

[HHM]

If you can afford a chapter 13, then I can't envision any hardship scenario that would work. You would probably be wasting your time seeking a hardship discharge of your student loan debt.

In any event, requesting a hardship discharge of student loans is NOT a matter of simply filling out a few forms, it is a full blown adversary proceeding, meaning a full blown civil lawsuit. You need to draft a complaint, conduct discovery, round up some expert witnesses to testify as to your hardship and why you cannot afford to payback your student loans, conduct a trial, etc.

[Character711]

Thank you HHM. My main objective is to have my student loan reduced. I borrowed 10,500.00 over a four year period ending in 1986. Because of inability to pay, it has gone up to 41,000.00 with interest and penalities. What do you suggest? Do I object to the amount? I want the judge to at least have the facts and decide and hopefully reduce some of the interest, penalities, etc.

[HHM]

As far as I can tell, there is no way to discharge the penalties. There simply is no exception in the BK code. The only way to discharge student loan debt is to prove a hardship.

The only argument that I can think of is to show that the penalty is not a educational benefit, but I have not seen any cases make that argument. We have another forum member who is trying the same thing.

[dumpinmydebt]

Student loans are not dischargeable, especially if you are Chapter 13. They will argue that if you can pay a 13, you can pay them. Plus, they will argue that if you have the money for the legal fees for adversary proceedings, then you have money to pay them.

The account should have been placed on hardship before penalties were accrued. Did you speak to them, or did you ignore their inquiries?

I had received letters for many months and then I contacted my lender, as I did not want my wages garnished. They put the account payments on hold due to financial hardship. I received no penalties.

[shazam]

Hey Character711: Lots of interesting opinions here (lotsa misinformation, too!) ... maybe you get what you pay for. You might want to read In re Espinoza (US Supreme Court) and In re Coleman (9th Circuit case/Los Angeles) regarding student loan discharge in Chapter 13 case. Very interesting pro-debtor opinion. That said, student loan discharge VERY difficult, even though theoretically possible in Chapter 13 and theoretically possible to afford too in a Chapter 13... again, maybe read the opinions in those cases.

[HHM]

I wouldn't say there is misinformation, just a realistic perspective.

Also, not sure your cases help in the underlying issue.
Coleman is largely a procedural opinion about when a debtor can seek hardship discharge in chapter 13.

http://scholar.google.com/scholar_case?case=15235306040222987981&q=Student+loan+%22In+re+Coleman+%22&hl=en&as_sdt=4003

And Espinoza is of NO HELP to anyone post 2005. The supreme court essentially said, we are going to allow this discharge IN THIS SPECIFIC case because of procedural issues, but that after passage of BAPCPA (2005) the method used in Espinoza is void.

[shazam]

Think again: ESPINOSA is CURRENT LAW - It is definitely GOOD LAW post BAPCPA ... Decided March 2010 (see below)... be careful HHM... just saying. COLEMAN is also good, and the question was procedural.

People on this board, just help yourself by doing your own investigation. Get the BEST INFORMATION from the BEST SOURCES... educate yourselves properly, empower yourselves. That's all that matters.

UNITED STUDENT AID FUNDS, INC., PETITIONER
v.
FRANCISCO J. ESPINOSA
No. 08-1134.
Supreme Court of the United States.
Argued December 1, 2009.
Decided March 23, 2010.

[HHM]

Now, that is misinformation.

Either you haven't read it, or you don't understand it. I hate to be harsh here, but the underlying chapter 13 case was filed PRE-BAPCPA.

At the end of the opinion, they basically said that if you tried to back-end a discharge of student loans WITHOUT seeking a hardship determination with an AP, would be considered bad faith litigation and subject the debtor and counsel to penalties.

http://scholar.google.com/scholar_case?case=5924617924025725694&q=UNITED+STUDENT+AID+FUNDS,+INC.,+PETITIONER+v.+FRANCISCO+J.+ESPINOSA+No.+08-1134.&hl=en&as_sdt=4003

"United argues that our failure to declare the Bankruptcy Court's order void will encourage unscrupulous debtors to abuse the Chapter 13 process by filing plans proposing to dispense with the undue hardship requirement in the hopes the bankruptcy court will overlook the proposal and the creditor will not object. In the event the objectionable provision is discovered, 1382*1382 United claims, the debtor can withdraw the plan and file another without penalty.

We acknowledge the potential for bad-faith litigation tactics. But expanding the availability of relief under Rule 60(b)(4) is not an appropriate prophylaxis. As we stated in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), "[d]ebtors and their attorneys face penalties under various provisions for engaging in improper conduct in bankruptcy proceedings," id., at 644, 112 S.Ct. 1644; see Fed. Rule Bkrtcy. Proc. 9011. The specter of such penalties should deter bad-faith attempts to discharge student loan debt without the undue hardship finding Congress required. And to the extent existing sanctions prove inadequate to this task, Congress may enact additional provisions to address the difficulties United predicts will follow our decision."

You need to understand what the debtor did in Espinoza. The debtor filed chapter 13 BK, put in the plan that a certain portion of the student loans would be discharged, and the student loan lender didn't object. But the debtor DID NOT file an AP. The court confirmed the plan. The chapter 13 was discharged. Then all this litigation took place that culminated in this supreme court opinion. The Supreme Court said 2 things in this opinion. (1) the debtor MUST bring an AP and show hardship to discharge student loans, period. (2) because of the finality of of judgments, the Supreme Court was not going to overturn this particular case under Federal Rules of Civil Procedure.

[shazam]

C'mon HHM... This is what happens when a lawyer wants to argue. Just look at it like this:
The string addressed a few things: is chapter 7 or chapter 13 AVAILABLE for discharging student loans? TO both the answer is YES. OF COURSE it requires an AP and a hardship determination... of course. Nothing to the contrary was offered. The court even goes on to mention that the possibility of filing a Chapter 13 may be a way for debtors who are otherwise unable to afford fees for AP litigation to afford through PLAN (incidentally, she wiped out $180,000+ in student loans through a chapter 13... OF COURSE, given specific facts in her case). Still, it remains that CH 7 & CH 13 provide solutions to student loans, at least theoretically (for now), and also require AP initiated by debtor AND finding of "undue hardship".

But if the goal here is to further confuse readers/followers of these strings and sound very "lawyerly", then I'd say this is one heckuv an effort in that direction.

Otherwise, why not point the people in the correct direction where they can LEARN and find some relief in acquiring more information? See it as a win-win prospect where no one need feel injured or harmed, especially not those seeking answers and who are struggling with DEBT, Student Loans or otherwise.

For anyone's edification, here a portion of the opinion from In re Coleman ... and if helpful please read for yourselves and ASK MORE QUESTIONS... don't run in fear of NOT KNOWING.

C. Hardship

Hardship to the debtor from postponing a decision in this situation supports a finding of ripeness. Abbott, 387 U.S. at 149, 87 S.Ct. 1507. Here, the hardship to Coleman is committing to a Chapter 13 plan for three to five years without any guarantee that her student loans will be discharged at the end of this time period. Because debtors must commit all of their disposable income to payments under a Chapter 13 plan, 11 U.S.C. § 1325(b)(1)(2), five years repayment is a considerable burden to bear without any guarantee that the debt will be ultimately discharged. 11 U.S.C. § 1328(a)(2).

Theoretically, Coleman could convert her case to a Chapter 7 bankruptcy, assuming that she meets the requirements for filing under that Chapter,[22] and receive a discharge under 11 U.S.C. § 727(a). However, it appears the reason Coleman filed under Chapter 13 rather than Chapter 7 was that she was unable to afford an up-front payment for the undue hardship litigation. In Chapter 7, debtors' attorneys may not be paid from the estate, so unless the attorney is paid up-front, she is unlikely to be paid.[23] In a Chapter 13, however, the attorney is often paid as part of the plan.[24]

1011*1011 Because Coleman apparently cannot finance the undue hardship litigation up-front, she would have to proceed with the undue hardship litigation pro se, if at all.

A fundamental purpose driving the bankruptcy system is to "relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." Local Loan v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). Debtors who are primarily burdened by student debt will not emerge from bankruptcy with a "fresh start" if those student loan debts are not dischargeable—and if they are forced to pursue the undue hardship matter pro se, the likelihood of a successful undue hardship hearing is probably substantially reduced given the complexity of the inquiry. See generally, Feather D. Baron, The Nondischargeability of Student Loans in Bankruptcy: How the Prevailing "Undue Hardship" Test Creates Hardship of Its Own, 42 U.S.F. L.Rev. 265 (2007). Because the undue hardship standard is extremely difficult to meet,[25] a debtor who would meet the undue hardship standard and yet is unable to obtain an undue hardship determination because it is not yet ripe may be forced to rely on public benefits—or may turn to credit as a means of meeting their basic needs. See generally, Elizabeth Warren, Less Stigma or More Financial Distress: An Empirical Analysis of the Extraordinary Increase in Bankruptcy Filings, 59 Stan. L.Rev. 213 (2006). In a case where a debtor faces genuine undue hardship from student loan debt, the debtor's best shot at a fresh start may be to litigate the matter in a Chapter 13 case.[26]

[justbroke]

We don't point people because we try not to give legal advice. Very few student loan discharges ever see the light of day let alone make it to a judgment in favor of the debtor.

HHM is right that you can't bring in pre-BAPCPA "precedence" into the post-BAPCPA world when a lot of these technicalities were fixed by Congress -- although they made a mess of a few things while trying to fix the bankruptcy code (especially the 707(b), 506(a) and 1325(a) fiasco... but that's another story.)

I've read Espinoza before it was heard by the Supreme court. This case was really about a Chapter 13 plan and whether a plan that technically disallowed payments on an otherwise non-dischargeable debt, would somehow magically make the debt "dischargeable" upon discharge of the debtor in the Chapter 13.

Adversary Proceedings (APs) are no joke and are not for even the average pro-se filer. If this were just some Complaint to Determine Secured Status or some other more litigated with more pro-debtor outcomes... then I'd say have at it (with my usual disclaimer to study FRBP, FRCP, FREv., etc). However, these student loans are specifically non-dischargeable in the code, and it is fought to the tooth and nail.

I suggest that if you want to do one... go see an attorney who specializes in them. It will be expensive ($5K and up) but may be worth it to discharge $250K in student debt. I would not point any debtor seeking to discharge a student loan to Espinoza at all. If they are in my District, I'd point them to the many cases that fail as well as the very limited few that are successful and ask them to look at the specific facts, should they try in my District.

So, I will continue to help those by encouraging to seek an attorney and to consider whether they even have a good sound legal basis for such a complaint.

[HHM]

No one is really saying that you CANNOT bring a student loan discharge case in chapter 13 BK. We are pointing out that doing so is more challenging. The OP never really posted specifics about their situation. So short of being a below median chapter 13 filer, doing a chapter 13 student loan discharge seems like an inherently uphill battle since a regular chapter 13 presumes the existence of disposable income.

If the only point you were trying to make is that a debtor CAN bring the proceeding in chapter 13, okay, fine. No one disagrees with that. However, the two cases you cited aren't very much help to a person seeking a hardship discharge since the issues in those cases are largely procedural and not substantive. Espinoza deals with a pre BAPCPA chapter 13 and is more about FRCP 60(b), finality of judgments. Coleman was about the timing of filing of student loan discharge in chapter 13. None of those cases really touches on the fundamental issues of whether the debtor, in the first place, is eligible for hardship discharge (i.e. Brunner and Abbot).