On May 22, 2013, the 9th Circuit Court of Appeals released its
opinion in Hedlund v. The Educational Resources Institute, Inc., and
Pennsylvania Higher Education Assistance Agency, Case 12-35258 (D.C.
6:11-cv-6281AA). That opinion
(and other pending decisions) may have made it a little easier on student loan
debtors to have their student loans discharged in bankruptcy. (Cue the
The path to this decision was a long long long (long) path. In 1997, Michael Hedlund
graduated from law school and started preparing for the bar exam in Oregon. While he attended law
school, part of that school was financed with student loans.
And, as is typical, the repayment of those loans was supposed to begin
about 6 months later.
During that initial 6 months, Mr.
Hedlund obtained a temporary job at the county district attorney’s
office. Also during that six
months, Mr. Hedlund waited for the results of the Oregon bar exam.
He unfortunately did not pass the bar. Mr. Hedlund retook the bar in
February 1998, but unfortunately did not pass that exam either.
As a result, he was unable to continue employment as a deputy district
attorney and found employment as a juvenile counselor.
Life continued on and he married and became a father by
By January 1999, the loans were set to enter repayment; however
Mr. Hedlund was able to obtain hardship forbearances.
Through a variety of events, he was eventually declared to be in default
on both of his loans and the entire $80,000 was declared due from one
lender. He attempted to
negotiate lower payments with no success. By 2002, Pennsylvania Higher
Education Assistance Agency (PHEAA) began garnishing his paycheck; then in May 2003, the other student loan
creditor The Educational Resources Institute (TERI) also began garnishing his
paycheck (yes, two garnishments at one time). At that point, Mr. Hedlund filed
for bankrupty protection. In
June 2003, Mr. Hedlund filed an adversary proceeding to determine whether his
student loans should be partially discharged. He settled with TERI prior to
trial and agreed to pay $17,718.15 at $50/month. PHEAA did not
After trial, the bankruptcy court granted a partial discharge of
all but $30,000 of the PHEAA debt (discharging approximately $50,000). PHEAA appealed the matter to the
Bankruptcy Appellate Panel (BAP).
The BAP reversed the bankruptcy court’s decision and reinstated the
debt. Mr. Hedlund then appealed
the BAP decision to the 9th Circuit Court of Appeals, and….the Court of Appeals
sent it back to the Bankruptcy Court.
The Bankruptcy Court heard arguments but before a decision was
reached, the assigned judge died.
A new judge was assigned and Judge Brandt ruled that all by $32,080 was
discharged of the PHEAA debt.
And PHEAA appealed again, this time to the Oregon District Court (another
option for appealing a decision).
The Oregon District Court reversed the Brandt decision and reinstated the
PHEAA loan. Mr. Hedlund again
The 9th Circuit Court of Appeals looked at the Brunner test (the
usual standard on whether a student loan debt is/should be dischargeable as
explained by my colleague, Kent Anderson). There are three steps (or prongs) to the
Brunner test and the bankruptcy court had considered those
1. The debtor
has made efforts to obtain employment, maximize income, and minimize
2. The debtor’s
efforts to negotiate a repayment plan; history of payments; and timing of the
attempt to discharge the debt
The 9th Circuit found that the bankruptcy court had examined the
efforts and applications for better jobs (as testified to at trial) and found
the efforts commendable and the expenses (including cell phones) were mostly
reasonable, but any unreasonable expenses were not enough to create bad
faith. The Court also ruled
that the Bankruptcy Court had examined the debtor’s efforts to negotiate a
payment plan and the only option that PHEAA had offered was a very large
payment, which would create undue hardship and would create an obligation that
would last into his senior years (Mr.
Hedlund was approximately 35 at the time and PHEAA payment plans were
each 30 years long, making Mr.
Hedlund 65 years old and paying off student
When the 9th Circuit looked at the District Court’s findings that
Mr. Hedlunds expenses were
immoderate and that he had not negotiated enough, the Court found that the only
standard that was applicable in order to reverse the Bankruptcy Court’s
decision was “clear error” and the Oregon District Court heard the matter “de
novo”. The difference
between the two is that the
District Court pretty much retried the case based on the evidence in
front of it (that’s “de novo”, Latin for “from the beginning”;
and the “clear error” review only allows a appellate court to make a
finding when there is clearly an error of law as applied to the facts. Therefore, the District
Court was wrong
The 9th Circuit Court of Appeals then turned to the record before
it and analyzed whether the Bankruptcy Court had committed any “clear
error”. The 9th Circuit found
that the bankruptcy court had not made any errors, had examined the evidence,
had used the Bruner test, and therefore, the reversal by the District Court was
wrong. The Court then remanded
back to the District Court to reinstate the discharge ordered by the Bankruptcy
does that mean? Nearly 10 years
after the first lawsuit brought by Mr. Hedlund to determine dischargeability, a
decision was reached that helps student loan debtors in
It means that in the Hedlund case, where he had made about 4
years of payments on one of his loans and about $950 on the other, that that
effort was reasonable. He
worked; his wife didn’t. That was
reasonable. He had mostly
reasonable expenses, including a cell phone. Reasonable expenses can include
maybe unreasonable expenses.
The Court did not find that it was necessary to move to another location
due to the low pay and underemployment Mr. Hedlund had obtained, his efforts to
find employment were reasonable.
Most of all— Mr. Hedlund
did not have to accept the Income Contingent Repayment Program payment with a 30
year term and $300-400/month payments as he would be paying for his own college
at age 65 years old at the same time that his children were starting
college. That is a
huge difference in how student loan repayment plans have been pushed onto
debtors in bankrupty.
Debtors do not have to go to extreme efforts to repay; debtors must make
reasonable efforts and a 30-year term may not be
In one of my recent articles here on Bankruptcy Law Network, I
discussed Elizabeth Warren’s first bill presented to Congress — on this very
subject of the unfair treatment that student loan debtors receive as opposed to
bank debtors. The
Consumer Financial Protection Bureau has issued a report on the matter of
private student loans and compared student loans to mortgages as the repayment
terms are often similar. Much more
needs to be done and there may well be another appeal in this case.
But for now, student loan debtors have a reason for
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