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Debtor Denied Discharge from Student Loans After Failing to Prove Undue Hardship

Thursday, November 17, 2011

Adam Brown | Bloomberg LawTraversa v. Educational Credit Management Corp. (In re Traversa), No. 10-4811, 2011 BL 278230 (2d Cir. Oct. 28, 2011) The United States Court of Appeals for the Second Circuit affirmed the denial of a debtor's request for a discharge of his student debt, holding that he failed to establish "undue hardship" under 11 U.S.C. § 523(a)(8), because there was insufficient evidence that his alleged medical conditions, which supposedly made him unemployable, were likely to persist.

Lower Court Rulings

John Traversa ("Debtor"), an attorney representing himself pro se, brought an action to discharge his student loan debt. Following a trial, the bankruptcy court denied Debtor's request. The bankruptcy court's decision was subsequently affirmed by the U.S. District Court for the District of Connecticut. Debtor appealed the ruling to the Second Circuit.

Debtor Failed to Show Undue Hardship

In rendering its decision on appeal, the Second Circuit explained that pursuant to § 523(a)(8) student loans are presumptively nondischargeable. Further, the Second Circuit stated that to defeat the statutory presumption against discharge, a debtor must establish that he or she would suffer "undue hardship" in the absence of a discharge. "Undue hardship," in turn, requires the debtor to show by a preponderance of the evidence:
(1) that the debtor cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
(Quoting Brunner v. N.Y. State Higher Educaction Services. Corp., 831 F.2d 395, 396 (2d Cir. 1987) (per curiam). Applying those factors to the instant case, the Second Circuit held that Debtor's trial testimony in which he claimed that he had been unemployed since 2004, that he lived with his mother, and that his only source of income was approximately $1,577 in monthly Social Security benefits was sufficient to satisfy the first prong of Brunner. Turning to the second prong of the Brunner test, the Second Circuit evaluated Debtor's trial testimony in which he admitted that his various medications were moderately effective in controlling his conditions and that he had no documentation to establish his alleged bipolar disorder. Further, Debtor testified that he had suffered from these conditions through the entirety of his college, law-school, and subsequent seven-year career. Lastly, Debtor submitted a notice from the Connecticut Department of Social Services referencing the agency's initial determination that he was eligible for benefits because he was "unable to work long-term," however, the Second Circuit found that the determination did not appear to be based on any factual or medical findings regarding his alleged disability. Ultimately, relying on Debtor's testimony, the Second Circuit determined that Debtor's testimony that he was incapable of finding and maintaining employment because he suffered from depression, sleeping disorders, ADHD, and bipolar disorder was insufficient to demonstrate that his situation was likely to persist into the future.

Second Circuit Affirms Lower Court Decisions

Accordingly, the Court affirmed the bankruptcy court's denial of Debtor's request for a discharge, ruling that he failed to prove that his medical conditions were likely to persist significantly into the future. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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