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Four circuits have split over just when a Chapter 13 debtor may get an “undue hardship” determination in an effort to write off student loan debt, which typically is not subject to a discharge even after the debtor exits bankruptcy. The latest appellate court to weigh in, the 9th U.S. Circuit Court of Appeals, on Aug. 1 sided with the 4th Circuit in allowing much earlier consideration by bankruptcy judges of hardship claims. In the Matter of Coleman, 2008 WL 2940306. This is at odds with the 5th and 8th circuits, which have held that the analysis must be done much closer to the end of the three-year or five-year repayment period in Chapter 13 cases, when there is a clearer view of the potential continuing hardship. At the end of the bankruptcy repayment period, any remaining student loan debt, unlike other unsecured debt, cannot be wiped out, but must continue to be repaid, unless the debtor asks the court to determine that the student loan repayment remains an undue hardship. The split leaves the Educational Credit Management Corp. (ECMC), which handles a majority of the student loan recovery efforts around the country, in a quandary over treatment of student loan hardship claims nationally. The ECMC will be weighing a request for reconsideration by the entire 9th Circuit, but no decision has been made, according to Curtis Zaun, an associate attorney at the ECMC in St. Paul, Minn. He said a significant percentage of Chapter 13 debtors don’t get debts discharged at the end of the bankruptcy for a variety of reasons, such as failure to make payments or get credit counseling. “The focus of our appeal is really the constitutional ripeness; if there is no discharge [of debts at the end of the bankruptcy], the hardship finding is just an advisory opinion,” Zaun said. The ripeness issue Lars T. Fuller of San Jose, Calif.’s Lars Fuller Law Firm, attorney for the debtor, said the ripeness of hardship claims is one of first impression for the 9th Circuit. Student loan debt has not been subject to discharge in bankruptcy since Congress amended the law in 1990, unless there is a hardship finding, or even a partial hardship, he said. Some circuits are split even over partial hardship claims, said Fuller, a solo practitioner. He said, “The real issue is that many debtors are not in a position to fund attorney fees up front” to make the hardship claim in other bankruptcy chapters. But wage earners filing Chapter 13 may pay attorney fees over time, allowing them to pursue hardship issues. Generally, Chapter 13 bankruptcies allow wage earners to reorganize by assessing reasonable living expenses, a payment schedule for secured debt, taxes and such things as child support. Any money left over goes toward paying unsecured creditors, including student loans. But unlike credit card debt, which is discharged at the end of the repayment plan period, student loans still must be repaid — unless the debtor sues to claim that the loan repayment remains a hardship. The central question is when the hardship claims are ripe for judicial review. Circuit Judge Michael Daly Hawkins wrote that most courts to address the issue do not specify which ripeness standard they are employing. Hawkins said bankruptcy judges must routinely make decisions based on predictions of future events in order to allow debtors to successfully reorganize and protect against further decline in asset values. He pointed out that many student loan repayment periods are 30 years, far longer than the Chapter 13 repayment plan period, thus requiring speculation of future ability to pay and potential hardships. Whether a hardship determination is ripe varies on a case-by-case basis, according to the court. For a debtor who has tried to make payments vainly for years, the facts may be sufficient to determine hardship, but for a debtor who files bankruptcy immediately after college graduation, it would be necessary to wait the duration of the repayment plan to determine the validity of the hardship claim, Hawkins wrote.

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