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Bar News - October 20, 2000 Judge Deasy Uses ‘Hybrid Approach’To Discharge Student Loans By: Dan Wise CONFRONTING THE DILEMMA of a borrower with limited earning potential and the bankruptcy statute’s clarity on the nondischargeability of her student loans, NH Bankruptcy Judge J. Michael Deasy recently crafted a compromise ruling based on what he called a “hybrid approach.” The result is that the borrower will continue to pay a portion of her $76,000 debt without violating the Bankruptcy Code’s protected status for student loans that does not permit partial discharges. “The issue of whether partial discharge is available,” Deasy wrote in an Aug. 22 decision named Sally Grigas v. Sallie Mae Servicing Corp., “has proved vexing to the judiciary, with the result that two opposing camps have been firmly assembled and a third camp is emerging. All three camps arrive at different ends, but start at the same beginning: the language of Section 523(a)(8)...provides that an educational loan shall not be discharged ‘unless excepting such debt from discharge...will impose an undue hardship on the debtor and the debtor’s dependents. Although all sides acknowledge the thrust of this language, difference exists regarding its malleability.” Deasy said he was uncomfortable with accepting the “strict” approach to reading the Bankruptcy Code, which would require an “all or nothing” decision on discharging approximately $76,000 in loans incurred by the 50-year-old debtor who attended art school late in life. On the other hand, Deasy said he was unpersuaded by the “flexible” reasoning used by judges in other jurisdictions to allow partial discharges. "The hybrid approach,” Deasy wrote, “follows the statutory reasoning of the ‘strict’ camp but goes one analytical step further that a debtor’s loans need not be aggregated and that Section 523 (a)(8) may be applied on an independent basis, thereby often reaching the equitable results found in the ‘flexible’ camp. Some of a debtor’s loans can be discharged while others may be found nondischargeable.” The creditor had been seeking payments of $650 per month over 30 years, and the debtor, who was working part-time as an art instructor and living at home, claimed she was only able to pay $200 per month over 10 years. The debtor’s attorney, Grenville Clark, III, of Manchester, said that the woman has limited earning potential because she has only worked in low-paying clerical jobs most of her life and has a glaucoma condition that will limit her ability to pursue art-related occupations in later years. Deasy said that Grigas’ student loans actually were comprised of 15 different loan transactions. By disaggregating them, Deasy said the court could analyze each loan, starting with the earliest first, to determine how much of a burden the debtor can bear. Once loans amounting to a total payment of $224 per month over 15 years had been analyzed, any later loans after that would be considered “an undue hardship” and would be discharged. “This charts new ground, at least in New Hampshire,” said Clark. “It’s awfully hard to get a discharge on a student loan, and when you do get them, it ‘s often because the borrower has some disability. In this case, the client did not currently have a disability, but she was older and we were able to demonstrate that her opportunities for improving her income were limited.” To read this decision, and obtain other information on the NH Bankruptcy Court, visit its Web site at www.nhb.uscourts.gov.
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