Student loan debt is the struggle of the latest generation (author included). Fortunately, more attention is being paid to it. Additionally, there is some increased awareness and movement to have student loans become dischargeable in bankruptcy. This case comes out of the Bankruptcy Court for the Middle District of Alabama. The facts are relatively commonplace: a 44 year old single mother of two boys. She is a special education high school teacher. Her income comes from her job as a teacher, as well as $500 in monthly child support. Her monthly income is about $3,500.00, and according to her filing, her income and expenses leave her with nothing at the end of each month. Among her debts listed was about $120,000.00 in student loans from a PhD program she pursued.
As background, student loans are generally not discharged in bankruptcy. There is an exception to this rule, and that is when the continued liability of the student loan would pose an “undue hardship” on the debtor. The term “undue hardship” is not defined by the Bankruptcy laws, but has been left open to interpretation by the courts. A case from here in the Second Circuit (federal appellate court covering New York) decided back in 1987 laid out a three-part standard that other courts around the country have used to determine undue hardship. These fact-specific inquiries include: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependent if forced to repay the loans; (2) 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 (3) that the debtor had made good faith efforts to repay the loans. Courts are left to make its decisions on a case-by-case, fact-specific basis.
In this case, the Court determined that the undue hardship test was met. With respect to the first prong, the Court determined that if the debtor had to continue payment of her student loans, which the Court calculated to be about $915.00 per month for the next 15 years, that the debtor would not be able to meet a “minimal” standard of living. As it was, the debtor’s expenses matched or were generally greater than her income. Although the debtor could eliminate certain expenses, like cell phone and cable, the test isn’t being able to live in poverty. Thus, the Court determined that there was no way, according to the debtor’s income and expenses, that she could maintain a minimal standard of living while paying the student loans.
With respect to the second prong, the Court found that it is unlikely that the debtor’s financial condition was going to change in the coming years. At the time of this case, one of her sons was 11 years old. At a minimum, she would be responsible for him for another 7 years. Also, when her sons are emancipated, she would lose the child support money. (Interestingly, the Court didn’t address any foreseeable increases income, which may or may not have existed in this case.)
Finally, the Court found that the debtor did make good faith efforts to repay her loans. According to the debtor, she has made payments towards the loans over a period of years, as well as applied for certain credits from the student loan servicer (which it denied her three times). Based on this analysis, the Court ordered that the payment of the student loans was an undue hardship on the debtor, and thus dischargeable.
The big takeaway from this case is its analysis of student loan dischargeability. It surveyed previous cases where debtors were attempting to discharge nominal amounts, as well as discharge student loans immediately after graduating. Further, the Court looked at the altered landscape of student loans, and the heavy burden that they are today – where it’s common for graduating student to have not $1,000.00 of student loan debt, but rather $100,000.00, and that the undue hardship test from 1987 needs some review in today’s world. In re Elizabeth, 12-31448-WRS, AP No. 13-3059-WRS (Bankr. M. D. Ala, March 25, 2015).