Short answer: Yes, federal student loans can be discharged in bankruptcy when repaying them would cause an “undue hardship.” In Koeut v. U.S. Department of Education, the U.S. Bankruptcy Court for the Southern District of California discharged $432,173.99 of a medical school graduate’s federal student loans and left a balance of just $8,291.67. Bankruptcy Law Center attorneys Ahren A. Tiller and Brett Bodie represented the borrower. This page explains the case, the legal test the court used, and what it means for California borrowers.
Forbes covered the decision when it came down: Bankruptcy Judge Wipes Out Over $430,000 In Student Loans For Borrower With String Of Bad Luck (Adam S. Minsky, Forbes, Dec. 14, 2020).
The facts come from the court’s published memorandum decision. Seth Koeut was born in a Cambodian refugee camp in Thailand and is now a U.S. citizen. He earned bachelor’s degrees from Duke University in 2002, studied clinical tropical medicine in Bangkok, and attended the Ponce School of Medicine in Puerto Rico from 2006 to 2010, where he passed all of his medical board examinations.
Then the system that places new doctors into residency programs failed him. The court found he “diligently applied to various residency programs for five years,” but never matched. Because completing a residency is a prerequisite to a physician’s license, he could not practice medicine.
What followed was a decade of temporary, low-paying work: retail sales, call centers, an answering service, a parking lot signaler job at the Del Mar Fair, restaurant host, and dishwasher. The court found that his total yearly income from all sources ranged from $3,026 (2010) to $31,473 (2017), and that he had applied for about 5,000 jobs, including 1,000 at UCSD. Meanwhile his federal student loans grew to $440,465.66 as of August 27, 2020: $328,909.02 in principal and $111,556.64 in accrued interest.
Most debts are wiped out in a Chapter 7 discharge, but student loans are a special exception. Under 11 U.S.C. § 523(a)(8), educational loans are not discharged “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” The statute covers government loans, loans made under programs funded by a governmental unit or nonprofit, and other “qualified education loans.”
Two practical points follow. First, the discharge is not automatic: a borrower must file a separate lawsuit inside the bankruptcy, called an adversary proceeding (Fed. R. Bankr. P. 7001). Second, the Code does not define “undue hardship,” so courts supply the test. In the Ninth Circuit, which includes California, courts apply the three-part Brunner test, as the Koeut court explained:
Mr. Koeut filed his Chapter 7 case in 2012 and had tried once before, on his own and without a lawyer, to discharge the loans in a 2015 adversary proceeding that was dismissed. On September 6, 2018, Ahren A. Tiller filed a new adversary complaint on his behalf against the Department of Education (Adv. No. 18-90130-MM). The federal court docket lists Ahren A. Tiller and Brett Bodie as counsel for the plaintiff. Mr. Bodie of Bankruptcy Law Center associated in for trial in October 2020 and filed the plaintiff’s trial brief and Mr. Koeut’s direct testimony declaration.
The case was built on documentation: the employment history, the income records, and roughly 500 pages of job applications presented to the government. That evidence answered the Department’s main argument, which was that Mr. Koeut should simply earn more.
Chief Judge Margaret M. Mann issued the memorandum decision on December 4, 2020, and the court entered judgment on January 13, 2021. The court went through each Brunner factor.
The Department did not dispute that Mr. Koeut could not meet his current expenses with his current pay. It argued instead that he should increase his income. The court rejected that argument because the first prong looks at current income and expenses, not future ones, and held the first prong was met.
The court projected that, with another ten years of experience, Mr. Koeut might earn about $55,000 a year. Even then, after taxes and reasonable expenses under the IRS standards, he would have only $41.87 per month available for his loans. The court found that he “will never earn sufficient income to fully repay his student loans,” and calculated that the present value of those small payments over 17 years, at the 0.11% federal judgment rate, was $8,291.67.
The court also addressed his decision not to enroll in an income-based repayment (IBR) plan. The court found his reasons were sound: an IBR plan would not forgive the remaining balance for 25 years, so he would carry most of the debt for nearly the rest of his working life, which he believed would keep hurting his credit and his job prospects. Following Ninth Circuit precedent, the court noted that refusing an IBR plan is not “dispositive” of bad faith. On his work ethic, the court was direct:
“A medical school graduate who works as a parking attendant and dishwasher cannot be described as lazy.”
Koeut v. U.S. Department of Education, No. 12-07242 (Bankr. S.D. Cal. Dec 4, 2020)
The court’s conclusion summed it up: “As the DOE admits, Koeut deserves a break.” It ordered a partial discharge of $432,173.99, leaving $8,291.67 with interest at 0.11%, payable at $41.87 per month from December 2031 to December 2048. The court docket shows no notice of appeal.
For more on the process, read our guides on how to file for student loan bankruptcy and bankruptcy and student loans in California. We also covered the national media attention to this case in Yahoo Finance Covers BLC’s $440,000 Student Loan Discharge Win. If you are considering a fresh start, see our page on Chapter 7 bankruptcy in San Diego.
Yes, if keeping the debt would impose an undue hardship on you and your dependents. You must file an adversary proceeding within your bankruptcy case and prove undue hardship; the regular Chapter 7 discharge does not cover student loans on its own.
No. In Koeut, the court discharged the part of the debt the borrower could not repay and left a small balance he could afford. Courts in the Ninth Circuit recognize partial discharges.
It is the three-part undue hardship test used by courts in California and the rest of the Ninth Circuit: (1) you cannot maintain a minimal standard of living if forced to repay; (2) that situation is likely to persist for much of the repayment period; and (3) you made good faith efforts to repay.
Possibly. The Koeut court held that the borrower had sound reasons for rejecting an IBR plan and that rejecting one is not dispositive of good faith. Your reasons and your overall repayment history matter.
In November 2022, the Justice Department and the Department of Education announced a standardized attestation process for federal student loan discharge cases. Koeut was decided before that process existed. Ask an attorney how the government is currently handling these cases before you file.
If student loan debt has made a normal life impossible, call 800-551-7922 for a free consultation with Bankruptcy Law Center. Learn more about attorney Ahren A. Tiller.
Case details above are drawn from the court’s published memorandum decision and the public docket in Adv. No. 18-90130-MM (Bankr. S.D. Cal.).
Prior results do not guarantee a similar outcome.
This article is general information, not legal advice.
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