Friday, March 28, 2008

bankruptcy - students loan

Sperazza v. Univ. of Maryland - ED Pa. - March 24, 2008

The district court affirmed the bankruptcy court's denial of appellant's request to discharge his student loans. The facts are not sympatheric, but the case has a short, clear discussion of the issues, as follows:

The Bankruptcy Code does not allow a Chapter 7 debtor to discharge educational loans “unless excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a).

In order to establish undue hardship, a debtor must demonstrate that: (1) based on his current income and expenses, he cannot maintain a minimal standard of living for himself and his dependents if forced to repay the loans; (2) additional circumstances indicate that the debtor’s status is likely to persist for a significant portion of the loan repayment period; and (3) the debtor has made good faith efforts to repay the loans. Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 304-05 (3d Cir. 1995) (adopting standard set forth in Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395, 396 (2d Cir. 1987)).

It is the debtor’s burden to establish each prong of the Faish test by a preponderance of the evidence, all prongs must be satisfied, and if “one of the elements of the test is not proven, the inquiry must end there, and the student loans cannot be discharged.” Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324, 327-28 (3d Cir. 2001).

This “test must be strictly construed,” and “equitable concerns or other extraneous factors not contemplated by the test may not be imported into the analysis.” Id. at 328. Strict application of the Faish factors “safeguards the financial integrity of the student loan program by not permitting debtors who have obtained the substantial benefits of an education funded by taxpayer dollars to dismiss their obligations merely because repayment of the borrowed funds would require some major personal and financial sacrifices.” Id.