Thursday, September 6, 2012

Student Loans: Are the dischargeable?

Student Loans: Are they dischargeable?

Published on by: Ian M. Falcone
Discharging Student Loans in a Bankruptcy

It seems that every week or so, I get a question regarding student loan debt. So, I figured I would do my best to answer the question: are they dischargeable? The technical answer is “yes”, but the reality is that the discharge is rare.


Prior to 1998, if a student loan had been in repayment for seven (7) years, the debt was dischargeable. However, on October 7, 1998, the Bankruptcy Code was amended to make federally issued or guaranteed loans non-dischargeable unless the debtor could prove an “undue hardship.” Private student loans, however, remained eligible for discharge.


On October 17, 2005, the Bankruptcy Code was amended again and substantially altered the student loan landscape. Now, not only were federally insured loans non-dischargeable unless a debtor could prove an “undue hardship” but now private loans follow the same rules. In fact, there is even concern that using a credit card to pay off a student loan could prevent discharge of that portion of the credit card debt.

The “Undue Hardship” Standard

The seminal case for determining whether a debtor can discharge student loans is In re:

  • Brunner, 831 F.2d 395 (1982) (adopted by the 11th Circuit in Hemar Inc. Corp of Am. V. Cox, 338 F.3d 1238 (11th Cir. 2003)). Under Brunner the burden is placed on the debtor to prove each of the following:
  • that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;
  • that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  • that the debtor has made good faith efforts to repay the loan.


Undue Hardship: The Minimal Standard of Living Factor

In determining whether the debtor can maintain a minimal standard of living, the Court must examine the debtor and her spouse's earnings to evaluate the quality of the debtor's lifestyle. See id. at 509. Debtors cannot satisfy the test "merely because repayment would require some major personal or financial sacrifices." Elmore v. Massachusetts Higher Educ. Assistance Corp. (In re Elmore), 230 B.R. 22, 26 (Bankr. D. Conn. 1999). Thus, the debtor must prove that she cannot afford the basic living necessities if forced to repay the loan. SeeIvory v. United States (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001) Rutherford v. William D. Ford Direct Loan Program (In re Rutherford), 317 B.R. 865, 878 (Bankr. N.D. Ala. 2004) (opining that the "minimal standard of living" relates to the smallest degree of income necessary to cover all expenses essential for daily existence).

The Bankruptcy Court for the Northern District of Alabama identified six factors that it deemed necessary for a minimal standard of living in America, including shelter, basic utilities, food and personal hygiene products, vehicles and the costs associated with a vehicle, health insurance, and some source of recreation. Ivory v. United States (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001).

The Bankruptcy Court for the Middle District of Georgia utilized these factors in its analysis of a student loan dischargeability filing and prior to its analysis of the facts, added: "[T]he Court must apply its common sense knowledge gained from ordinary observations in daily life and general experience to determine whether Debtor's expenses are reasonable and necessary. If Debtor expends funds for items not necessary for the maintenance of a minimal standard of living or if Debtor expends too much for an item that is needed to maintain that minimal standard of living, then it is unlikely that, given Debtor's present circumstances, the first prong of the Brunner test is satisfied where such overpayment would permit Debtor to cover the expense of her student loan debt without sacrificing a minimal standard of living . . . ." Douglas v. Educ. Credit Mgmt. Corp. (In re Douglas), 366 B.R. 241, 253-54 (Bankr. M.D. Ga. 2007

Undue Hardship: Additional Circumstances

The second prong of the Brunner test requires a debtor to prove that additional circumstances exist indicating that she cannot maintain a minimal standard of living for a significant portion of the repayment period if the loans are not discharged. A debtor must show "a total incapacity . . . in the future to pay [her] debts for reasons not within her control." In re Mallinckrodt, 274 B.R. 560, 566-67 (S.D. Fla. 2002)(quoting Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324, 328 (3d Cir. 2001). Further, satisfaction of the second prong should be based on a "certainty of hopelessness." In re Douglas, 366 B.R. 241, 256 (Bankr. M.D. Ga. 2007) see also Downey v. Sallie Mae, Inc. (In re Downey), 255 B.R. 72, 76-77 (Bankr. N.D. Fla. 2000).

Undue Hardship: Good Faith Efforts

Under the third and final prong of the Brunner test, a debtor must act in good faith to repay the loan. The good faith analysis requires the Court to consider the debtor's efforts to obtain employment, maximize income, and minimize expenses. Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 402 (4th Cir. 2005). Furthermore, "the debtor may not willfully or negligently cause [her] own default, but rather [her] condition must result from 'factors beyond [her] reasonable control.'" In re Roberson, 999 F.2d 1132, 1137 (7th Cir. 1993). Whether the debtor has made or attempted to make payments is not itself dispositive, but the Court should evaluate the debtor's conduct in the broader context of her entire financial picture. Nary v. Complete Source (In re Nary), 253 B.R. 752, 768 (N.D. Tex. 2000)


In a recent New York case, the Judge determined that a 64 year-old frugal woman who worked on an assembly line earning $11 per hour and had received a layoff notice was entitled to a discharge. Bene v. Educ. Credit Mgmt. Corp (In re Bene), 2012 Bankr. LEXIS 2914. In reaching its conclusion, the Court took notice of the fact that the debtor had obtained the loan in 1981, had never completed her education (she left school to care for her sick parents), had completed a five (5) year Chapter 13 case in which she partially paid the student loan, owed $56,000 against an original loan amount of $17,000 and that even under the William D. Ford Program that attempts to assist with loan repayment, the debtor would need to pay the debt for an additional 25 years until she reached age 89 and had no prospects of income, other than social security.

Clearly, it is not easy to discharge student loans.