9th CIRCUIT
HOLDS THAT CHAPTER 13 “UNDUE HARDSHIP” DETERMINATIONS FOR STUDENT LOANS DO
NOT HAVE TO WAIT UNTIL THE DISCHARGE AT THE END OF THE CASE
Educational
Credit Management Corp. v. Coleman, (9th Cir 2008)
Opinion
available in PDF form at US Ct. of Appeals for the 9th Circuit opinion
website:
http://www.ca9.uscourts.gov/ca9/newopinions.nsf/opinions+by+date?OpenView&Start=1&Count=100&Expand=1.1#1.1
On August 1,
2008 the 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could
get a judicial determination whether her student loans constituted an “undue
hardship” and were thus dischargeable without waiting until just before or
after the end-of-case discharge. Going against two other Circuits, the Fifth
and the Eighth, and joining one other Circuit, the Fourth, the 9th Circuit
held that the matter was ripe for adjudication, although the debtor’s
Chapter 13 case was less than a year past confirmation of debtor’s five-year
plan. Interestingly, it buttressed its position by citing a earlier 9th
Circuit Bankruptcy Appellate Panel opinion, In re Taylor, 334 B.R. 747,
751-52 (1998), which had been overturned on other grounds.
The panel
applied U.S. Supreme Court standards for “constitutional ripeness” and
“prudential ripeness”.
Constitutional
ripeness existed here because 1) a “substantial controversy” arose from
debtor’s attempt to discharge the debt and the student loan creditor’s
objection to the discharge, 2) this controversy was “definite and concrete,
not hypothetical or abstract” because it was about a specific debt, and 3)
was “of sufficient immediacy and reality” and not “impermissibly
speculative” since it relied on only “ a single factual contingency,” her
completion of plan payments, instead of a “series of contingencies.”
Prudential
ripeness turns on “the fitness of the issues for judicial decision” and “the
hardship of the parties of withholding judicial consideration.”
On the
“fitness” issue the Court of Appeals determined that the undue hardship
issue requires a bankruptcy court to look usually far into the future to
weigh the debtor’s ability to repay the debt during the lengthy term of the
loan, and that delaying a relatively short time “is unlikely to provide
much, if any, additional benefit to the bankruptcy court’s resolution of the
issue.” And as for whether there has been enough time to determine whether
the debtor has made a sufficient good faith efforts to repay the debt, that
depends on the timing of each case—here the Court determined that debtor’s
attempts to repay from 1999 until her Chapter 13 filing in 2004 was a
sufficient time for the bankruptcy court to make this evaluation. (The
Court strongly implied that a debtor who files her Chapter 13 case soon
after becoming liable on her student loans would not have a ripe
controversy.) Importantly, the Court disagreed with the Eighth Circuit in
holding that the “hardship” determination does NOT need to be made IN
REFERENCE TO THE TIME OF DISCHARGE; there is no such timing requirement in §
523(a)(8).
On the
“hardship of the parties” prong of the prudential ripeness test, the Court
became very pragmatic and frank, at least as to the hardship to the debtor.
It stated that subjecting a debtor to committing all her disposable income
for five years is “a considerable burden to bear without any guarantee that
the debt will be ultimately discharged.” Fascinatingly, the Court
acknowledged that the primary reason the debtor was still in her Chapter 13
case, instead of converting to Chapter 7 when her income was reduced, was
because she could not pay the up-front attorney fees in a Chapter 7 case to
fight the “undue hardship” battle whereas in a Chapter 13 case these fees
could be spread out over time. The Court concluded by relying on the “fresh
start” purpose of bankruptcy in candidly stating: “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.”
BOTTOM LINE: To
the extent that the 1998 In re Taylor BAP opinion has been uncertain
authority, having been overturned albeit on other grounds, along with a
scattering of bankruptcy court and U.S. District Court opinions, this brand
new 9th Circuit opinion gives Chapter 13 debtors’ attorneys, in the
appropriate circumstances, strong ammunition to file “undue hardship”
adversary proceedings earlier rather than later. And this case also provides
some guidance for student loan creditors to argue lack of ripeness in the
appropriate cases. Finally, this opinion virtually invites debtors’
attorneys confronted with a new client who had a good “undue hardship” case
but no way to pay up-front attorney fees to litigate it, to think seriously
about filing a Chapter 13 case instead of Chapter 7, where it is legally and
ethically fitting to do so.
