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Woman Can Declare Bankruptcy on Student Loans Due 5 Years Before, Court Rules

April 29, 1986

SAN FRANCISCO (AP) _ A woman who attended college on a government loan and declared bankruptcy more than five years after the first installment was due can escape further loan payments, a federal appeals court has ruled.

The 9th U.S. Circuit Court of Appeals said its ruling Monday was the first federal appellate court decision on the issue, although many federal bankruptcy courts have reached the same conclusion.

Sharon Ann Nunn, who attended Western Washington College in Bellingham, Wash., on a $3,990 National Direct Student Loan, was to begin repayment in March 1978, nine months after she graduated. Repayments were scheduled over 10 years at 3 percent annual interest.

The court said Ms. Nunn made payments totaling $333 through May 1981. She filed for bankruptcy in December 1983.

The dispute involved a federal bankruptcy law that says an educational loan made or insured by the government can be ″discharged in bankruptcy″ if it first became due more than five years before the borrower filed for bankruptcy.

A loan that is discharged in bankruptcy can be repaid, along with other debts, from any assets of the bankruptcy. In Ms. Nunn’s case, there was no money in the bankruptcy estate to repay the loan, said her lawyer, Dennis Burman.

The university argued that the five-year period applied to each installment of the loan, so that installments due later than five years before Ms. Nunn filed for bankruptcy would still be owed. A federal bankruptcy and U.S. district judge agreed, but the appeals court reversed the ruling and said the entire unpaid balance was discharged.

″A loan obligation can ‘first’ become due only once, not several times,″ said the opinion by Judge Stephen Reinhardt.

He said Congress was concerned that former students would avoid repaying loans by declaring bankruptcy before they entered the work force.

With the goal of ensuring that graduates would declare bankruptcy only for legitimate reasons and not to avoid paying back student loans, the law sets a fixed period of five years after the first installment for a bankruptcy to discharge the unpaid balance of the loan, Reinhardt said.