Appeals Court Discharges $300,000 in Student Loans, Despite Purchase of Deck and “Loaded” SUV

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

June 9, 2010

The 8th Circuit Federal Bankruptcy Appellate Panel recently upheld a Minnesota bankruptcy court’s discharge of $300,000 in student loans, even though the debtor’s husband was paying for a newly installed screened-in deck and had just purchased a luxury Chevrolet Suburban.

In this case, In re Walker, 2010 WL 1407769 (8th Cir. BAP April 9, 2010), the court was clearly swayed by the debtor’s inability to work, due to family considerations and having to care for her autistic children, as well as the fact that it was not actually the debtor’s income that was used for the luxury purchases.

The debtor had incurred her student loan debt pursuing a bachelor’s degree and various postgraduate degrees.  Her employment history was interrupted at times by the pursuit of further degrees, and also by having five children with her husband, a police officer.  Two of the children had autism, which required the debtor’s attendance at 27 to 37 hours per week of therapy for the children provided by the school district.

The debtor filed chapter 7 in 2004, receiving a general discharge in the case.  During the next three years, her husband’s income ranged from $59,261 to $67,639 per year.  In 2005, the debtors spent $30,000 of a $50,000 second mortgage to build a screened-in deck.  In 2007, the debtor’s husband purchased a $40,000 SUV, his fourth motor vehicle.

In 2007, the debtor filed a lawsuit asking the bankruptcy court to discharge her student loans as an undue hardship.  The appeals court agreed with the bankruptcy court that the debtor’s lawsuit was not untimely under the legal doctrine of laches.  It held that the court could consider a student loan dischargability case even years after the underlying bankruptcy was discharged and closed.

Next, the appeals court held that the proper time for the court to examine whether the debtor’s student loan payments were an undue hardship was the time of trial in 2007, not the time of the bankruptcy filing in 2004.

Next, the appeals court observed that the debtor’s household net income was, at the time of trial, $4,355.48.  The household living expenses were $5,913.00.  As such, there was no way the debtor could make meaningful payments toward the student loans, nor could she afford to pay the student loans under an Income Contingent Repayment Plan.  This would have been true even if the deck and SUV had not been purchased.  In any event, the deck and SUV payments had been found reasonable under the unique circumstances of the debtor’s marital and family situation.

The appeals court also rejected the student loan lender’s argument that the fact that the debtor was making payments on the deck and SUV proved that “the money was coming from somewhere,” and thus the debtor could pay on the student loans.  The debtor’s net income and living expenses figures had not been rebutted by the lender, and those figures showed no income from which to make student loan payments.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: June 28, 2010