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Won’t I Be Sanctioned For Trying To Discharge Student Loans?

We have heard from many attorneys who live in districts that sound more like creditors’ boardrooms than courts of law.  These attorneys have expressed concern that even filing these student loan cases opens them up to sanctions by the court. While this may happen in some rogue courtrooms, it surely has no basis in applicable law or the plain language of Rule 11.

Sanctions under Rule 7011 are obviously a real thing and can include paying the attorneys fees of the opposing side or any other remedy the court feels justified.  However, they are “to be granted sparingly and should not be imposed lightly.” [1]  Rule 11 has three categories of “frivolous conduct” for affirmative litigation including:

(1) Filing a case for an improper purpose.

(2) Filing a case not supported by existing law or by a “nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.”

(3) Filing a case where the factual contentions either have no evidentiary support or likely will not have evidentiary support upon further discovery.

Basically, you need to be sure of three things to comply with Rule 11. First, you are not filing the case merely to harass your opponent or clog the court’s docket. Second, you have some case law on your side (But note that even if you don’t, you can still file cases with zero support in precedent if you have a reasonable argument for a new interpretation of the law). Third, you have made a reasonable inquiry into the facts of the case, and believe that upon further discovery, your client’s factual allegations are supported by evidence.   And of course, be respectful, and ensure that your pleadings are properly drafted and timely filed.

All three of these elements are met no matter what type of student loan adversary proceeding you are filing.  If you are seeking to discharge student loans that don’t fall within the statutory exception for discharge, there is ample precedent to support this argument (don’t allege federal loans can be discharged without proving “undue hardship” because federal loans are absolutely immune without proving “undue hardship”).  Just be sure you have looked into whether the school was accredited, or the loans exceed the “cost of attendance.”  If you’ve used the Student Loan Analyzer, your due diligence is largely complete on that score.  If you are seeking to prove “undue hardship,” apply a similar level of diligence: check your client’s finances to determine whether they can reasonably afford to make their payments based on their income and the original terms of the loans.

At the end of the day, all you are seeking is to ensure your client gets their “Fresh Start,” which is the central purpose of the Bankruptcy Code.  If your client qualifies for bankruptcy and has large amounts of non-dischargeable student loan debt, it’s hard to imagine how they are not operating under an arguable financial “undue hardship.” Point being, your case is not frivolous and your client has a constitutional right to seek relief (the judge gets to decide whether they are entitled to relief).

Now when it comes to making your adversary prove their loans are presumptively non-dischargeable, use your best judgment. If they have all the documents and you are satisfied they can meet their burden, it may be in your best interest to stipulate to avoid annoying the judge, and risking sanctions for wasting the court’s time.  But surely make the creditor prove their burden to your satisfaction.  In all of this, remember that trial is rare, the judge will likely never adjudicate these issues, and the creditor is not stupid either.  If the creditor cannot gather the necessary evidence to meet their burden, they are risking sanctions by going into trial without any ability to prove their case (sanctions are a two-way street and denying allegations without sufficient evidence is also sanctionable conduct under Rule 11(b)(4)).

If you are living under a regime that would sanction an attorney for simply seeking to help their client with an untenable student loan burden, you may need to get sanctioned and appeal. There are tons of consumer law groups that would likely help you with an appeal pro bono (reach out to me and I’ll help you). Living in a terror state is no way to practice law, and the Court of Appeals may need to step in and remind your judge that debtors have due process rights too.

[1] In re CMGT, Inc., 458 B.R. 473, 483 (Bkrtcy.N.D.Ill.,2011).