Sunday, May 9, 2010

Student Loan Discharge Denied Because Circumstances Causing Undue Hardship Occurred After Discharge Was Entered

Student loan dischargeability is a hot issue.  A court recently addressed the issue of whether the circumstances causing "undue hardship" must occur prior to the underlying chapter 7 discharge.

In Zygarewicz v. Educational Credit Management, 423 B.R. 909 (Bankr. E.D. Cal. 2010), a chapter 7 debtor filed bankruptcy and received a discharge of all dischargeable debts. However, one of the debts not discharged was debtor’s student loan debt. The student loan debt was not discharged because debtor could not demonstrate that repayment of the student loans would cause an undue hardship.

Two years later debtor’s situation changed for the worst. Debtor suffered a severe injury in a vehicle accident. Debtor then believed debtor would be able to prove that repayment of the student loans would cause an undue hardship. Debtor reopened the bankruptcy case and filed an adversary proceeding against the student loan creditor seeking a ruling that the student loan debt is discharged.

The student loan creditor objected to the discharge because the event causing debtor’s hardship arose years AFTER the discharge order had been entered. The bankruptcy court agreed and entered judgment in favor of the creditor. The court concluded that the circumstances causing a chapter 7 debtor’s financial hardship must arise PRIOR to the entry of the discharge order. Here, the court believed that debtor’s circumstances could not form the basis of a determination that repayment of the student loan would be an undue hardship since the circumstances causing debtor’s hardship (the vehicle accident) arose after the entry of the discharge.

Debtor should consider refiling a new bankruptcy case and attacking the student loan debt within the new bankruptcy case. Contact me if you have questions.

Robert V. Schaller
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