As is too well known to need further elucidation here, borrowers are uniquely challenged to meet the “undue hardship” standard required by law to discharge educational debt in bankruptcy. The Department of Educations July 07, 2015 guidance letter provides little additional clarity and no new options for discharge.
It appears that the DOE continues to pursue even older and destitute debtors through the appeal process notwithstanding its own guidelines recognize that some debtors may undergo undue hardship if their debt is not released in bankruptcy. See, for example, Roth v Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013) wherein the DOE opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on Social Security income of only $774 a month, i.e. would have paid nothing on her student loans even if she lost her case.
What is the desperate student loan debtor to do? One approach, if one meets the means test in one’s state is to have some of the debt disqualified as educational debt and therefor subject to the undue hardship rules as was discussed at this blog post from August 25, 2018. Another option, if one’s income falls above the means test guidelines, is to have the educational debt qualified as business debt, not ordinary consumer debt. There is no per se rule that student loans must be treated as consumer debt, but that is the typical approach of courts.
There are many challenges to having educational debt qualified as business debt. First, simply because it isn’t consumer debt, doesn’t necessarily mean that it’s business debt. Further, the courts across the US have split on who must prove the nature of the debt. Does the debtor bear the burden of proof that his/her student loan was motivated by ongoing business requirements as suggested in Aspen Skiing Co. v. Cherrett, No. 14-60079 (9th Cir. 2017)? Or, must the United States Trustee (the UST) bear the burden of proof that the debt is primarily consumer debt, as was suggested in In re Ferreira, 549 B.R. 232 (Bkrcy E.D.Ca.2016)
The issue of qualifying educational debt as business debt for the purpose of bankruptcy is complex in that it depends not only upon the debtor’s business at the time the debt originated, but also upon the interpretation of the law in the debtor’s bankruptcy district, which seems to vary even in the face of similar facts. Still, when considering one’s options in dealing with overwhelming debt, borrowers may want to evaluate whether some or all of their student loans can be recharacterized as business debt, not ordinary consumer debt.