Massive Student Loan Debt Wiped Out In Chapter 7 Bankruptcy Litigation

In early October 2022, Phillips & Thomas LLC successfully litigated a student loan adversary proceeding that arose out of a Chapter 7 bankruptcy case in the District of Kansas.  The case was In Re Vasko (Adv. No. 21-6020, District of Kansas, June 7, 2021).  The facts were as follows.   

The Debtor filed a Chapter 7 petition in the District of Kansas (case 20-21082) on August 3, 2020.  She received her discharge on November 16, 2020.  On June 7, 2021, she commenced an adversary proceeding against the U.S. Department of Education, seeking a court ruling that her student loans should also be discharged in her bankruptcy case.  The balance of her student loans were $301,918.51.  The Debtor had incurred the loans during her schooling in the early 2000s.  However, she had been unable to secure or maintain employment that would enable her to pay the loans off.  She did make payments towards the loans over the years that totaled $7,802.

As is well known, student loan debts are not automatically discharged in a bankruptcy case.  A debtor must undertake separate litigation in a bankruptcy case for a chance to wipe out student loan debts.  To have a chance at discharging student loans in the District of Kansas, a debtor must demonstrate the so-called Brunner factors, which are:  (1) the debtor will not be able to maintain a minimal standard of living if forced to repay the loans; (2) the debtor’s income prospects are unlikely to change in the foreseeable future; and (3) the debtor has made a good faith effort to repay the loans. 

While these factors are simple to state, they have been the subject of much litigation over the years.  A large body of case law has developed around them, and courts have typically evaluated them on a case-by-case basis.  There have been encouraging signs in recent years that courts have become more aware of the economic circumstances faced by debtors burdened with significant student loan debt. Some bankruptcy courts (including those in Kansas) have allowed partial discharge of student loans, which points to a willingness to craft equitable solutions for debtors in dire financial straits. 

The adversary proceeding in In Re Vasko was litigated for about a year and a half.  The case included two depositions and various documents exchanged in discovery.  The debtor, an Amazon delivery driver, argued that repaying the loans would not allow her to maintain a minimal standard of living.  She also explained that her income prospects were unlikely to change significantly in the foreseeable future.  As a single mother with a net income of around $3,800 per month, she argued that she had made a good faith effort to pay as much as she could pay over the years. 

The case was settled between the parties on the eve of trial.  The debtor agreed to pay the U.S. Department of Education $30,000 in installments.  In return, the remaining balance of the student loan debt ($271,919) would be discharged in the bankruptcy.  We should note that this was not some repayment plan where the loans were “forgiven.”  The balance of the loans was actually discharged in the bankruptcy, which is something very different.  This resolution of the case allows the debtor to get her fresh start, completely free of the crushing debt burden that had been hanging over her head for many years.  From a legal perspective, In Re Vasko may stand for the proposition that student loan creditors are becoming more aware of the need to embrace flexible, case-specific solutions to resolve the student loan crisis.          

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