25 Aug When Is An Undue Hardship Not An Undue Hardship? When It Involves A Student Loan.
Student Loans are generally not dischargeable in bankruptcy, and there is no statue of limitations on their collection. This makes it very difficult to get away from a student loan, and now it appears that the bar has been raised and it is even harder to receive a hardship discharge from a student loan in the 4th Circuit bankruptcy courts.
The standard for a hardship discharge has long since been recognized in the three prongs of the Brunner Test, which is considered the leading bankruptcy case on student loan discharge. Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).
In the unpublished decision Roberta Spence vs. Educational Credit Management Corporation (06-2114 4th Cir. July 30, 2008), the Court of Appeals reversed the decision of the bankruptcy court, who had found that a hardship justified the discharge of Ms. Spence’s student loan.
The Appeals Court first found that Ms. Spence met the first prong, and that it was without dispute that the debtor met the 1st prong of Brunner in that the debtor could not maintain a minimal standard of living if she had to repay the student loan.
The second prong proved more problematic. When it came to a the “certainty of hopelessness” that the debtor would never be able to repay the loan, the Court stated:
We conclude that Ms. Spence has not met this exacting standard. She is now in her late 60s and has a low-paying job, but she is by all accounts a reliable, diligent worker with a master’s degree along with completed Ph.D. course work. Her grades were excellent, and her education is not so outdated that higher-paying alternatives would be unreachable. Ms. Spence suffers from diabetes and high blood pressure, but neither these ailments nor her current below median income should discharge her from repaying the $161,000.00 in student loans owed to EMC.
The third prong looked at what effort the debtor had made to repay her loans and she was found lacking on having made a good faith effort to pay.
Apparently the debtor had been unable to earn enough to make payments. She had deferred them and had not had a history of payments upon the loan. This is a Catch-22 since if someone can’t find a job after school that will allow them to maintain a minimal standard of living, how are they going to make payments on the loan to establish a good faith effort to pay?
It seems that being a senior citizen with a low paying job and medical issues wasn’t enough. The Court didn’t feel that the debtor had maximized her efforts to find a better paying job. After reading the decision I see that hope really does spring eternal, since the judges believe that this woman is going to be able to get a great job at her age. Call me a pessimist, but it just doesn’t seem very realistic, especially given the present economic times when so many people are out of work and most people are just thankful to have any job.
Prior to 1998, if more than seven years had passed from when a student loan was first due, it could be discharged in bankruptcy. However changes to the bankruptcy laws in 1998 made student loans non-dischargeable in bankruptcy unless there is an “undue hardship.” In a New York Times article published on August 24th, 2008, they explored the difficulties of overwhelming student debts and explored the need to once again make student loans dischargeable in bankruptcy in less limited circumstances.
The decision to file for bankruptcy is a difficult one. Even if student loans are not discharged the debtor may gain significant relief from debts that are. However as student loan debt grows without any constraint or end to collections while the ability of students to find employment earning enough to repay the debts, another debt crisis looms over us.
by Susanne Robicsek, Charlotte Bankruptcy Lawyer
What is the Brunner Test for Dischargeability of Student Loans? August 23, 2007 by Kent Anderson, Eugene Oregon Bankruptcy Lawyer
Is Administrative Discharge of Student Loans Available in Bankruptcy? June 20, 2008 by Kent Anderson, Eugene Oregon Bankruptcy Lawyer
Student Loans and Income Contingent Repayment Plans August 5, 2007 by Jed Berliner, Springfield MA Bankruptcy Lawyer
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