In Missouri, Can I Discharge My Student Loans?

In order to discharge the typical student loan, a debtor has to prove repayment would be an “undue hardship.” But what you think is a real hardship and what a judge thinks is “undue” will probably be two separate things.

Missouri is part of the Eighth Circuit Court of Appeals region. Unlike most of the rest of the country where Bruner is the test, the circuit court has announced a broader — potentially more generous — test under In re Andresen, 232 B.R.
127 (B.A.P. 8th Cir. 1999) applying a 1981 decision by the Court of Appeals.

Andresen applied a “totality of the circumstances” standard which is supposed to take into account the debtor’s past, present and future ability to pay, the debtor’s family’s expenses to maintain a minimal standard of living, and any other relevant facts or circumstances surrounding their situation. Notably, it does not require the debtor to have proven they made an effort to repay in the past but rather it focuses on your future ability to repay.

While in theory this means our region might be more generous in discharging student loans, the reality is that very few people qualify. Take for example, the case of a 39-year old woman with a 10-year old child to care for earning only $14,000 in Minnesota but carrying over $61,000 in student loans. She lived with her parents in order to make ends meet. She suffered from medical problems but was able to work at least 9-months out of the year and was trying to pursue an additional degree in order to pursue a new career.

The Bankruptcy Appellate Panel declined to grant her a discharge of her student loans because, in part, she might earn more when she completed the additional degree. And at her current income level, a tight budget could yield $54/month to repay the loans under the Income Contingent Repayment Program (ICRP). Since the ICRP would result in forgiveness of the debt after 25-years (and this would be before her actual retirement age) then it was not an undue hardship.

The difficulty with such determinations is that it is a largely mechanical idea — if your budget can be squeezed or enough hypothetical extra income can be found so you can afford the ICRP payment then that can be the decisive factor. In fact one Missouri BAP judge, while concurring in the result of a discharge, said “the debtor’s ability to afford payments under the ICRP is determinative.”

The ICRP-focused procedures do not take into account the harm that may result from the potentially-taxable income resulting from a “forgiveness” of tens of thousands of dollars of debt in one year. And, more importantly, how difficult is it for someone earning only $14,000/year — with a dependent and over $60,000 of debt on their credit report already — to finance anything? It virtually ensures that lower-income folks for whom large student loan debt turned out to be a poor “bet” will never be able to borrow for a home or even a car at reasonable interest rates.

In order to effectively prove what we all know intuitively about the effect of so much debt on low-income families, the debtor would likely need to hire expert witnesses. On top of hiring a lawyer to fight the battle — and the likely appeal if she wins. Needless to say, it’s not entirely wrong to say, “If you can afford to fight this battle, then you can afford to pay so you lose.” It is a Catch-22 situation awaiting, someday, a solution. Perhaps when Congress is somewhat less-enamored of the student loan lenders it will help.