Single Mother Wins Discharge of Student Loans in Bankruptcy Court

Female Student

As I’ve commented before (such as here and here), the student loan issue is something that should be receiving plenty of attention in the coming months.  Bankruptcy offers an interesting opportunity for student loan debtors because, under certain circumstances, courts are willing to discharge student loans.  In this case, the debtor (who, to me, more people can relate to than some other debtors that have tried to discharge their student loans) was successful in her fight to discharge student loans.

In this case, out of the United States Court of Appeals for the Eighth Circuit, the debtor had about $27,000.00 of student loan debt.  Originally, between 2002 and 2004, the debtor took out about $15,000.00 in student loans while she was taking classes to become an accounting clerk.  She was unable to pass a required class, so she dropped out of the school.

In 2007, the debtor took out a new student loan of about $5,300.00 to pursue training as an esthetician.

After graduating, she started renting space in a tanning salon, but was never able to build up enough clientele to make ends meet, so she left that job.

She has never made a payment towards any of her student loans, as they were always in deferment or forbearance.

She filed for bankruptcy and sought to have her student loans discharged.  The bankruptcy court ruled in favor or the debtor, and the Department of Education appealed.


In bankruptcy, a debtor can seek discharge of their student loans under the hardship doctrine.  Many courts apply a standard set out in a case from the Second Circuit (here in NY) called the Brunner Test.  The Eighth Circuit, however, applies a totality of the circumstances analysis (which is arguably less tough and strict), which looks at three factors:

  1. past, present and future financial resources of the debtor;
  2. the reasonable and necessary living expenses of the debtor; and
  3. other relevant facts and circumstances, which include: (1) total present and future incapacity to pay debts for reasons not within the control of the debtor; (2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment; (3) whether the hardship will be long-term; (4) whether the debtor has made payments on the student loan; (5) whether there is permanent or long-term disability of the debtor; (6) the ability of the debtor to obtain gainful employment in the area of the study; (7) whether the debtor has made a good faith effort to maximize income and minimize expenses; (8) whether the dominant purpose of the bankruptcy petition was to discharge the student loan; and (9) the ratio of student loan debt to total indebtedness.


In its analysis of the past, present and future financial resources of the debtor, it found that she was a single mother of 3 dependent children.  She has been working a job for the last 6 years, never making more than $25,000.00 per year, and has a take home pay of about $1,500 per month.  Additionally, she receives public assistance, has no savings, and has received contributions from her mother to make ends meet.

The court found that the debtor has had consistently limited financial resources, and will likely have limited financial resources in the foreseeable future.  As such, this factor weighed in favor of discharge.


In looking at the debtor’s reasonable and necessary living expenses, it found that she has monthly income of $2,413 and monthly expenses of $2,475, so spends more than she takes in.  Since the court found that the expenses listed in the debtor’s bankruptcy papers are reasonable and necessary, this factor weighed in favor of discharge.


In looking at other relevant facts and circumstances, the debtor testified that her car is in need of repair and may likely need to be replaced in the near future, which will be tough because of her poor credit history.

Also, the education received from the student loan proceeds has not resulted in gainful employment.

The Department of Education argued that, under a couple of student loan repayment options, the debtor’s monthly student loan payment could be $0.  The court found that just because a student loan repayment plan is available doesn’t mean that the debtor shouldn’t be entitled to a hardship discharge.  Moreover, the negative credit effect of the loans, as well as the potential tax implications when the repayment plan ends all weighed in favor of discharge.  In re Fern, 16-6021 (8th Cir., Feb. 2017).


Student loans are dischargeable in bankruptcy.  Unfortunately, it has to be the right debtor at the right time under the right circumstances.  The courts around the country are split in how they analyze student loan discharge cases.  It remains to be seen how the new administration and legislators will address the surging student loan debt, including whether they will use bankruptcy as a tool to help struggling debtors.

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