Student Loan Discharge Upheld Under Clear-Error Standard

For many graduates, the weight of student loan debt can be overwhelming, particularly in a weak job market. However, for at least one, that burden has been reduced just a bit by virtue of a bankruptcy discharge. In a recent decision, the U.S. Court of Appeals for the Ninth Circuit reversed an Oregon district court judgment in Hedlund v. Educational Resources Institute, No. 12-35258, D.C. No. 6:11- cv-6281-AA, finding that court's de novo review of a Section 523(a)(8) proceeding to be improper and holding that the bankruptcy court's good-faith finding should be reviewed solely for clear error. In its opinion, the Ninth Circuit held that the bankruptcy court's review of the evidence, and its finding that the student loan debtor had made good-faith efforts to repay his loans, was not clearly erroneous.

Michael Hedlund's story is one that is playing out repeatedly across the country. He is a law school graduate, married and the father of one child, living and working in Klamath County, Ore. Like most law school students, Hedlund financed his law school education with Stafford loans, which in 1999, shortly after graduation, went into repayment. At that time, his outstanding balance was over $85,000, and his monthly payments totaled over $800. Unfortunately, Hedlund never successfully passed the Oregon bar exam, but did maintain a full-time job as a juvenile counselor. Despite Hedlund's efforts to consolidate his loans and negotiate a more feasible payment schedule, he was unable to make headway, resulting in the two companies servicing his loans taking judgments against him and commencing garnishment of his wages.

As a result, in 2003, Hedlund filed a Chapter 7 bankruptcy petition. He also commenced an adversary proceeding against the loan servicers, seeking a partial discharge under Section 523(a)(8) of the Bankruptcy Code. While most student loan debt is presumptively non-dischargeable under Section 727, Section 523(a)(8) provides an exception, wherein student loan debt may be dischargeable when such debt "would impose an undue hardship on the debtor and the debtor's dependents." The bankruptcy court partially discharged Hedlund's debt (all but $30,000).

However, the Ninth Circuit's Bankruptcy Appellate Panel (BAP), following a direct appeal by one of the loan servicers, reversed the lower court's decision and noted in Hedlund v. Pa. Higher Education Assistance Agency (In re Hedlund), 368 Fed. Appx. 819, 821 (9th Cir. 2010), that "it would not...