The First Circuit Bankruptcy Appellate Panel insinuated that the Department of Education’s so-called borrower defense to the repayment of student loans cannot be raised under Section 523(a)(8) without first exhausting administrative remedies in the DOE.
Even if there were no requirement to exhaust administrative remedies, the July 29 opinion for the BAP by Bankruptcy Judge Enrique S. Lamoutte tells us that the borrower defense to the repayment of student loans can only be based on misconduct by the educational institution, not by alleged misconduct by later employers.
The debtor took out about $500,000 in student loans to attend medical school. She washed out of her residency in psychiatry. Although she made hundreds of applications afterward to other residency programs, she was never accepted and thus never earned a license to practice medicine.
The debtor filed a chapter 7 petition and was given a general discharge. She filed an adversary proceeding to declare that her student loans, which had grown to $650,000 with interest, were dischargeable under Section 523(a)(8).
At filing, the debtor was earning about $1,600 a month teaching as an adjunct biology professor at a community college. Her monthly expenses, she said, were about $1,700.
The debtor advanced several theories explaining why repayment would impose an “undue hardship,” the standard contained in Section 523(a)(8). Aside from the borrower defense, she argued that she should not be required to seek more lucrative employment because she would be overqualified for jobs that she might be offered.
Bankruptcy Judge Elizabeth D. Katz of Springfield, Mass., ruled against the debtor and held that the student loans were not dischargeable. The debtor appealed to the BAP.
In bankruptcy court, the parties had agreed to apply the “totality of the circumstances” test. Because the First Circuit has not specified the exact standard for determining “undue hardship,” Judge Lamoutte applied the same standard.
Judge Lamoutte had several grounds for upholding Judge Katz. For example, he said that Judge Katz did not err in finding that the debtor had not attempted to maximize her income.
With regard to the borrower defense, the debtor blamed her financial circumstances on the alleged misconduct of the director of the residence program from which she was dismissed. His misconduct, she argued, prevented her from gaining employment in her chosen field as a physician.
Judge Lamoutte described the borrower defense and its genesis in the Higher Education Act of 1964. It allows the Secretary of the DOE to promulgate regulations providing a defense to repayment of student loans if the school engaged in misconduct.
To invoke the borrower defense, 34 C.F.R. § 685.206, Judge Lamoutte explained that the regulations require an act or omission of the school attended by the student.
Judge Lamoutte said that “an adversary proceeding to discharge student loan debt for undue hardship under § 523(a)(8) of the Bankruptcy Code is not the appropriate procedural vehicle in which to raise a borrower defense.” The regulations, he said, require an application to the DOE and an adjudication of the claim by a department official.
Judge Lamoutte found no evidence that the debtor ever made an application to the DOE “or otherwise complied with the DOE’s administrative process.” Although he did not say so precisely, he seemed to mean that a debtor must exhaust administrative remedies before raising the borrower defense in a dispute over dischargeability of student loans.
Judge Lamoutte found the defense unavailable for a second reason. He said it can only be raised if the cause of action arises from an “act or omission of the school attended by the student that relates to the making of the loan or enrollment at the school or the provision of educational services for which the loan was provided,” quoting 34 C.F.R. § 685.206(c).
The debtor’s allegations of misconduct were against the residency program, not against the school “for which the student loans were obtained,” Judge Lamoutte said.
Affirming Judge Katz, Judge Lamoutte held that the borrower defense was “inapplicable to the debtor’s student loans” because the misconduct was not by the medical school for which she obtained the loans but by the residency program in which she subsequently enrolled.
The First Circuit Bankruptcy Appellate Panel insinuated that the Department of Education’s so-called borrower defense to the repayment of student loans cannot be raised under Section 523(a)(8) without first exhausting administrative remedies in the DOE.
Even if there were no requirement to exhaust administrative remedies, the July 29 opinion for the BAP by Bankruptcy Judge Enrique S. Lamoutte tells us that the borrower defense to the repayment of student loans can only be based on misconduct by the educational institution, not by alleged misconduct by later employers.