While it is possible to discharge student loan debt in a bankruptcy proceeding, a debtor seeking to do so has to show the Bankruptcy Court that repaying the loan would create “an undue hardship.”
This can be a very big hurdle.
And lenders are now attempting to create another impediment: mandatory arbitration provisions. Such provisions require the student loan borrower to submit any claim arising under the note to arbitration.
Although some bankruptcy judges have been persuaded by the lenders’ claims that arbitration provisions are applicable to whether the debt is dischargeable under the Bankruptcy Code. Bankruptcy Judge Jeffrey J. Graham of the Southern District of Indiana Bankruptcy Court is not among them.
Judge Graham recently denied a lender’s motion to compel arbitration as to whether a student loan was dischargeable as an undue hardship pursuant to 11 U.S.C. §523(a)(8). The order, entered on November 16, 2018 in In Re.: Mathew Richard Roth, Case 18-50087, articulated two reasons for the denial. First, compelling arbitration within a bankruptcy proceeding is contradictory to the Code, the primary purpose of which is to give the debtor a fresh start. “The primary tool for effectuating a debtor’s fresh start is the discharge.” Requiring arbitration would remove this “essential function of bankruptcy law from bankruptcy courts.” Permitting parties to opt out of the bankruptcy process would permit them “to contractually overrule the application of federal bankruptcy law”, and specifically the discharge provisions of the Code. Second, Judge Graham wrote that having all of a debtor’s obligations determined promptly and efficiently by the bankruptcy court is “a pillar of federal bankruptcy law.” Allowing arbitration of one debt, when other debts are not subject to arbitration, would be “inefficient, costly and time consuming.”
Judge Graham concluded that arbitrating a dischargeability dispute as to student loan debt is inconsistent with the purpose of the Bankruptcy Code, and he declined to enforce the arbitration provision in the student loan promissory note.
If you have questions about what debts can be discharged in bankruptcy or require assistance prosecuting or defending an adversary proceeding, contact one of our attorneys for guidance. Harley Means, James Knauer, and Melissa De Groff.
Please use the following link to view the Order Denying Motion to Compel