November 4

Discharging Student Loans in Oregon Bankruptcy Court May Become Easier

Last month the Department of Education issued a report proposing two key changes in the way student loans are treated in bankruptcy.

The report was in response to President Obama’s March 10 Presidential Memorandum on a Student Aid Bill of Rights, which sought recommendations on student loan laws ranging from servicing to bankruptcy.

Read the full report.

Borrowers Should not be Defaulted Because a Co-Signor Files Bankruptcy

The first proposal seeks to prohibit servicers from placing borrowers in default automatically because their co-signor dies or files bankruptcy. The report reasons that current borrowers should not be driven into “financial ruin” due to circumstances outside their control.

Private Student Loans Should be Dischargeable in Bankruptcy

The second proposal suggests making private student loans dischargeable in bankruptcy. The report reasons that unlike federal loans, private student loans often don’t provide borrowers any income-based repayment options.

Related article: How to Discharge Student Loans in Oregon Bankruptcy Courts


Michael Fuller is a partner at Olsen Daines in Portland, Oregon and a consumer law adjunct professor at Lewis & Clark Law School.

October 22

Discharging Student Loans in Oregon Bankruptcy Courts – Part 4 of 5

This post discusses how to meet the third ‘good faith’ prong of the Brunner undue hardship test in Oregon bankruptcy courts.

This is the fourth post of a five-part Q&A series about discharging student loans in Oregon. Prior posts discussed the general rule that student loans are non-dischargeable, reviewed the types of educational debts subject to the general rule, introduced the undue hardship exception, and examined the first and second prongs of the Brunner test.

Q: How do I pass the third ‘good faith’ prong of the Brunner test?

A: You must prove that you’ve made good faith efforts to repay your student loans.

In Degroot, the Oregon district court considered a number of factors relevant to good faith, including (1) whether the debtor has worked to maximize income and minimize expenses, (2) whether the debtor has made an effort to negotiate a repayment plan, (3) whether the debtor has made any payments on the loan, and (4) the timing of the debtor’s attempt to have the student loan discharged.

In Blackbird, the Ninth Circuit BAP acknowledged that a lack of bad faith is not enough to pass the third Brunner prong. Instead, a debtor must provide actual evidence of affirmative good faith efforts. In Hedlund, the Ninth Circuit held that factual determinations of good faith by a bankruptcy court can only be reversed on appeal in cases of clear error.

Q: Can I pass the third Brunner prong if I’m holding out for a job in my chosen profession?

A: Probably not; you need to work as many hours as possible.

In Mason, the Ninth Circuit ruled that a debtor lacked good faith because he only worked part time as a home siding installer and refused to find a second part time job. The court rejected the debtor’s argument that working more hours would make it more difficult for him find a full time career. The court was also critical of his refusal to make more than one attempt to pass the bar exam. In Ristow, the Ninth Circuit BAP found a lack of good faith, in part, based on a debtor’s refusal to work for less than six figures in her chosen field upon graduation. 2012 Bankr. LEXIS 1289 (9th Cir. BAP Mar. 26, 2012).

In Birrane, the Ninth Circuit BAP found a lack of good faith because a debtor was underemployed and no evidence suggested she was willing to take a second job outside her chosen field. The court reasoned that she could have used her knowledge as a dance instructor to teach private lessons but chose not to.

Q: Can I pass the third Brunner prong if my spouse isn’t working?

A: Yes, so long as you’ve made all attempts to maximize your income and reduce expenses.

In Hedlund, the Ninth Circuit ruled that a debtor passed the third Brunner prong because although his wife didn’t work full time, he made good faith efforts to increase his income, was “well-placed for his skills”, and had unsuccessfully applied for two higher-paying jobs. The court recognized that the debtor’s failure to pass the bar exam after three tries was not “within his control.”

Q: Do I have to take a higher paying job in another city to pass the third Brunner prong?

A: No, so long as any potential increase in wages would be offset by increased costs of living.

In Heldlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong because although higher paying jobs might have been available outside of Klamath Falls where his family lived, any potential salary increase would be offset by increased living expenses.

Q: Must I request an unemployment deferment to pass the third Brunner prong?

A: Probably.

In Roth, the Ninth Circuit BAP acknowledged that whether a debtor has sought deferments or forbearances may be indicative of good faith. In Pena, the Ninth Circuit allowed debtors to pass the third Brunner prong, in part, because they requested an unemployment deferment rather than immediately file bankruptcy.

Q: Can I meet the third Brunner prong if I didn’t apply for a repayment plan before filing bankruptcy?

A: Possibly, so long as you wouldn’t have qualified.

In Jorgensen, the Ninth Circuit BAP ruled that a debtor’s failure to accept a repayment plan does not necessarily equate to bad faith.

In Roth, the Ninth Circuit BAP reasoned that a repayment plan’s terms, duration, and future tax and credit consequences must be considered in determining whether a debtor’s refusal to accept a repayment plan was reasonable. The court allowed the debtor to pass the third Brunner prong even though she never applied for a repayment plan because she mistakenly believed she would not qualify. Her failure to apply was also mitigated by the fact that her repayment amount would have been zero. The court reasoned that the law doesn’t require a party to engage in futile acts, and the debtor could have faced potentially disastrous tax consequences at the end of her 25 year repayment period.

In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong even though he never applied for an income contingent repayment plan (“ICRP”). The court based its decision, in part, on the debtor’s good faith determination that he didn’t qualify for ICRP because his loans were in default. In Kelly, the Ninth Circuit found that the third Brunner prong was met because although the debtor never applied for loan repayment options, she had a good faith belief that she was ineligible. 594 Fed. Appx. 413, (9th Cir. 2015). In Gray, the Oregon bankruptcy court allowed a debtor to pass the third Brunner prong because although he didn’t apply for an ICRP, there was no guarantee his loans would qualify for such a program. 2006 Bankr. LEXIS 4230 (Bankr. D. Or. June 19, 2006).

However, in Mason, the Ninth Circuit found a lack of good faith, in part, because a debtor didn’t pursue ICRP options with diligence. In Cianciulli, the Oregon bankruptcy court found a lack of good faith because a debtor failed to enroll in an ICRP before filing bankruptcy, even though he didn’t qualify for ICRP at the time of trial. 2005 Bankr. LEXIS 1129 (Bankr. D. Or. June 7, 2005).

Q: Can I meet the third Brunner prong if I reject a repayment option offered just before trial?

A: Potentially, so long as the repayment option was clearly not affordable.

In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong even though he rejected three pre-trial repayment options offered just before trial. The court reasoned even the 30-year, $300 per month options offered were still more than he could afford.

However, in Birrane, the Ninth Circuit BAP ruled that a debtor failed the third Brunner prong because she failed to take any steps to renegotiate a repayment schedule under an ICRP before trial. Although she was denied for an ICRP before filing bankruptcy, the court was persuaded by the fact that she failed to re-apply or make any payments after filing bankruptcy. Based on the student loan company’s promise that she would qualify for $141 payments and receive a discharge after 25 years, the court refused to discharge her debts through bankruptcy. In Degroot, the Oregon district court recognized that a debtor must continue making good faith efforts to repay student loans, even after a bankruptcy is filed. The court ultimately ruled that the debtor lacked good faith by failing to apply for an ICRP during her bankruptcy proceedings. In Ristow, the Ninth Circuit BAP held a debtor failed the third prong in part because she rejected applications for ICRP out of fear her husband would become obligated for the payments. 2012 Bankr. LEXIS 1289 (9th Cir. BAP Mar. 26, 2012).

In Rosen, the court recognized that although the good faith requirement may continue up until trial, it does not go on indefinitely. The court ultimately refused a student loan company’s request to abate its decision on dischargeability by six months to avoid infringing on the debtor’s fresh start.

Q: Can I meet the third Brunner prong if I haven’t made any payments on my student loans?

A: Potentially, so long as your failure to make payments was beyond your control.

In Jorgensen, the Ninth Circuit BAP ruled that good faith requires proof a debtor made efforts to repay her loans, or proof that forces preventing repayment were beyond her control. In Birrane, the Ninth Circuit BAP held that whether a debtor has a history of making or not making payments is not necessarily dispositive of whether the third Brunner prong is met.

In Rosen, the Oregon bankruptcy court allowed a debtor to pass the good faith prong because although he didn’t make any payments on his student loans, his disability limited his ability to work. In Hedlund, the Ninth Circuit allowed a debtor who made only one voluntary $950 payment on his student loans to pass the third Brunner prong. Although his voluntary payments were minimal, he had paid 16 months of uncontested wage garnishments prior to filing bankruptcy. In Roth, the Ninth Circuit BAP held that a debtor’s lack of payments was not in bad faith because she was simply unable to pay due to garnishments and tax refund offsets outside of her control.

However, in Williams, the Ninth Circuit ruled that a debtor lacked good faith, largely because he failed to make any student loan payments from the time he took out his loans until the time he filed bankruptcy. 9 Fed. Appx. 696 (9th Cir. 2001).

Q: Can I pass the third Brunner prong if I repaid other debts instead of my student loans?

A: Potentially.

In Pena, the Ninth Circuit ruled that debtors acted in good faith even though they used back disability benefits to pay down a large amount of general unsecured debt instead of repaying a relatively smaller amount of student loan debt.

Q: Can I pass the third Brunner prong if my wages were garnished to repay my student loans?

A: Probably, if the garnishment was uncontexted.

In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong, in part, because he allowed his student loan creditor to garnish his wages without objection for 16 months prior to filing bankruptcy.

Q: Can I pass the third Brunner prong if I file bankruptcy shortly after my student loans come due?

A: Probably not.

In Hedlund, the Ninth Circuit allowed a debtor to pass the third Brunner prong, in part, because he had waited four years after receiving his student loans to file bankruptcy. The court compared the debtor to the student in Brunner, who filed bankruptcy in bad faith just one month after her first student loan payment became due. In Kelly, the Ninth Circuit allowed a debtor to pass the third Brunner prong, in part, because she paid thousands of dollars toward her student debt over an eight-year period before filing bankruptcy. 594 Fed. Appx. 413 (9th Cir. 2015). In Roth, the Ninth Circuit BAP was persuaded by the fact that the debtor waited over a decade after her loans became due to file bankruptcy.

However, in Degroot, the Oregon district court found a lack of good faith because the debtor filed bankruptcy shortly after receiving her student loans.

The last post in this series will discuss how income contingent repayment plans work, when to ask for a partial discharge of student loans, chapter 13 options, the statute of limitations on student loans, how to handle student loan collector harassment, and the ability to seek redetermination of dischargeability if circumstances change.

October 15

Discharging Student Loans in Oregon Bankruptcy Courts – Part 3 of 5

This post discusses how to meet the second prong of the Brunner undue hardship test in Oregon bankruptcy courts.

This is the third post of a five-part Q&A series about discharging student loans in Oregon. Prior posts discussed the general rule that student loans can’t be discharged in bankruptcy, reviewed which types of educational debts are subject to the general rule, introduced the undue hardship exception under the Brunner three-prong test, and examined the first Brunner prong.

Q: How do I meet the second prong of the Brunner test?

A: You must prove your undue hardship will continue in the future.

The first Brunner prong examines whether your current expenses and earnings leave no monthly disposable income to make your student loan payments. Assuming you meet the first prong, the second prong examines your future financial prospects.

In Mason, the Ninth Circuit ruled that the second prong required proof of at least one ‘additional circumstance’ indicating a debtor’s state of affairs was likely to persist in the future. In Carnduff, the Ninth Circuit BAP determined that the second prong must be proved by a preponderance of the evidence standard (meaning more likely than not).

Q: What types of circumstances satisfy the second Brunner prong?

A: Over a dozen types of circumstances may qualify.

In Nys, the Ninth Circuit listed various circumstances that could satisfy the second Brunner prong, including: 1) serious mental or physical disability of a debtor or a debtor’s dependents which prevents employment or advancement; 2) a debtor’s obligations to care for dependents; 3) lack of, or severely limited education; 4) poor quality of education; 5) lack of usable or marketable job skills; 6) underemployment; 7) maximized income potential in the chosen educational field, and no other more lucrative job skills; 8) limited number of years remaining in a debtor’s work life to allow payment of the loan; 9) age or other factors that prevent retraining or relocation as a means for payment of the loan; 10) lack of assets, whether or not exempt, which could be used to pay the loan; 11) potentially increasing expenses that outweigh any potential appreciation in the value of a debtor’s assets and/or likely increases in a debtor’s income; 12) lack of better financial options elsewhere.

The Nys opinion made clear that although a debtor can’t purposely choose a lifestyle that prevents her from repaying her student loans, her additional circumstances need not be any more compelling or extreme than that of an ordinary person in debt. The court ruled that the second Brunner prong may be satisfied even in the absence of any serious illness or psychiatric problems.

Q: Can I meet the second Brunner prong if I’m eligible for retraining?

A: It depends whether a new career will allow you to repay your student loans.

In Rosen, the Oregon bankruptcy court ruled that the second Brunner prong was met based on evidence a debtor’s financial status was likely to deteriorate in the future. The court reasoned that the debtor was permanently disabled with no college education or specialized skills. Although he was eligible for vocational retraining, the court saw no evidence that retraining would allow him to obtain a better paying job.

Q: Can I satisfy the second Brunner prong if I’m relatively young?

A: Potentially, so long as your student loans are so large you’ll never be able to repay them in full.

In Carnduff, the Ninth Circuit BAP held that debtors met the second Brunner prong, even though they were young, educated, and likely to increase their incomes in the future. The court reasoned that although the debtors’ incomes were likely to increase, they would need to win the lottery or find a gold mine to repay their student loans in full. In Hedlund, the Oregon district court determined that a debtor passed the second Brunner prong because despite his youth, education, and good health, even a full time well-paying position in the future wouldn’t allow him to make payments during the repayment period that would ultimately pay off his loans.

Q: Do I satisfy the second Brunner prong if I’m disabled?

A: Probably, so long as your disability is permanent and your benefits don’t allow you to repay your student loans in the future.

In Pena, the Ninth Circuit held that a debtor met the second Brunner prong based on her disability. The court was persuaded by her testimony that her mental impairment was permanent, and that she had already qualified for disability benefits. In Jorgensen, the Ninth Circuit BAP held a debtor passed the second Brunner prong because although her cancer may have been unlikely to return, she still suffered anemia, hypothyroidism and high blood pressure that limited her ability to work.

However, in Nichols, the Ninth Circuit BAP held debtors did not pass the second Brunner prong because although they had health problems, they did not establish they were disabled and could not work. 2013 Bankr. LEXIS 4623 (9th Cir. BAP July 9, 2013).

Q: Can I satisfy the second Brunner prong if I received no educational benefit from my student loans?

A: Yes, so long as your poor education is keeping you from repaying your loans in the future.

In Pena, the Ninth Circuit held that a debtor met the second Brunner prong based on his lack of job potential. The court held that whether the debtor received any educational value from his student loans at ITT were relevant to his future ability to repay his debts.

Q: Can I satisfy the second Brunner prong if I have ADD?

A: Yes, so long as your ADD will keep you from repaying your loans in the future.

In Mason, the Ninth Circuit held a debtor passed the second Brunner prong because his life-long learning disability impacted his ability to succeed. Although the debtor attended law school, he received special accommodations, and had difficulty holding positions that require attention to detail. The court dismissed the argument that the debtor’s disability should not be an additional factor because he was disabled prior to receiving his student loans. The debtor was ultimately granted a partial discharge, based on evidence his situation would improve in the future. In Mendoza, the Ninth Circuit held that a debtor passed the second Brunner prong because his ADD presented a substantial barrier preventing him from improving his state of affairs. The court was persuaded by the fact that the debtor had lived at or below the poverty line and was occasionally homeless. Although he previously attended medical school, the court determined he was unable to afford prescription medication or even dental care that might help improve his situation. 182 Fed. Appx. 661 (9th Cir. 2006).

In Gray, the Oregon bankruptcy court ruled that a debtor passed the second Brunner prong because his mental impairments were “the stripes of his coat” and thus would not improve even through psychotherapy. 2006 Bankr. LEXIS 4230 (Bankr. D. Or. June 19, 2006).

Q: Can I satisfy the second Brunner prong if I earned a degree and am currently employed?

A: Only if an additional circumstance proves your future income will not be enough to repay your student loans.

In Williams, the Ninth Circuit ruled that the second Brunner prong requires “unique” or “exceptional” circumstances. The court held the debtor did not meet the second prong because although he had trouble finding work in the past, he was currently employed as a teacher. 9 Fed. Appx. 696 (9th Cir. 2001).

In Rifino, the Ninth Circuit determined that a debtor failed the second Brunner prong because her job as a social worker and her degree would likely allow her to increase her salary over time. In Birrane, the Ninth Circuit BAP held a debtor failed the second Brunner prong because no additional circumstances limited her road to financial recovery. The court noted the debtor was mentally healthy, educated, and could earn more money if her dance company took off. In Carter, the Ninth Circuit BAP held a debtor failed the second Brunner prong based on his testimony that he was in line for a promotion at work and expected a decrease in transportation expenses. 2011 Bankr. LEXIS 4831 (9th Cir. BAP Nov. 8, 2011).

Q: Can I satisfy the second Brunner prong if I have current monthly disposable income?

A: Yes, if your age and health make it likely you cannot work much longer.

In Sequeira, the Oregon bankruptcy court held a debtor passed the second Brunner prong because although she currently had $176 disposable income, she would not be able to sustain that income for more than another seven and a half years, based on her age and medical difficulties.

However, in Degroot, the Oregon district court ruled that where debtors choose to incur educational debt later in life, the fact that they will reach retirement age during the loan repayment period is not enough alone to meet the second Brunner prong. The court reasoned that the debtor’s financial circumstances were of her own choosing because she left her prior profession as a CPA to start a small business.

My next post will explore the third Brunner prong.

October 15

Ninth Circuit Overrules Controversial 2010 Bankruptcy Opinion

Written by Michael Fuller

Today, the Ninth Circuit Court of Appeals ruled that consumers in bankruptcy may seek reimbursement for the fees they incur recovering damages caused by automatic stay violations.

The court’s en banc opinion, In re Schwartz-Tallard, overruled a controversial 2010 case, Sternberg v. Johnston, which expressly prohibited courts from awarding fees incurred recovering damages under § 362(k) of the Bankruptcy Code.

See related post: Payday Lender Liable for Expenses Incurred Prosecuting its Bankruptcy Violation

In Schwartz-Tallard, a debtor sued her mortgage company after it wrongfully foreclosed on her home during bankruptcy. The mortgage company denied all liability but lost in bankruptcy court and on appeal. Due to Sternberg’s holding, Schwartz-Tallard could not recover the fees she incurred defending the bankruptcy court’s ruling on appeal.

Today’s opinion expressly overruled Sternberg. The en banc court reasoned that Sternberg’s holding undercut Congressional intent to “encourage injured debtors to bring suit to vindicate their statutory right to the automatic stay’s protection…” The opinion recognized that the purpose of the automatic stay’s remedial scheme was to deter violations and provide redress for those that do occur. The court cited a brief filed by the National Association of Consumer Bankruptcy Attorneys showing that under Sternberg’s holding, “in many cases the actual damages suffered by the injured debtor will be too small to justify the expense of litigation, even if the debtor can afford to hire counsel.”


Michael Fuller is a partner at Olsen Daines and a consumer law adjunct professor at Lewis & Clark Law School.

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