Student loans have become one of the largest financial concerns of our
generation, and for good reason. Today, student loan debt exceeds all
other types of debt, and has been noted as a substantial barrier to major
life milestones, such as buying a home, for millions of young Americans.
While efforts have been made to address student loan debt on a large scale,
individual debtors still find it difficult to deal the very real problems
Although many people believe that student loan debt is not dischargeable
in bankruptcy, the truth is that it can be discharged. Because student
loan debt is treated differently in bankruptcy than credit card debt and
other types of obligations, there are additional burdens debtors must
bear in order to prove that their student loan debt constitutes an “undue
hardship.” In many bankruptcy courts, however, the standards for
proving an undue hardship are often narrowly applied, which means that
discharging student loan debt in bankruptcy has not been very common.
With a new decision from a federal bankruptcy court in Iowa, however,
debtors saddled with student loan debt may have new hope.
The decision stems from
Fern v. Fedloan Servicing, in which the court ruled that a student loan debt of $27,000 was dischargeable
because it created an undue hardship, despite the fact that the debtor
could have paid $0 a month had they enrolled in a repayment plan. Further,
the court determined that the emotional burden of the debt itself was
a considerable justification for the undue hardship.
The facts of the case concerned a single mother of three who, not being
able to collect on child support payments, supported herself and her children
on a roughly $1,500 a month income, government benefits, and additional
loans. In addition to expenses associated with providing for her family,
she also accumulated student loan debts in an attempt to further her education.
She accrued debt through several student loans, including a program she
did not complete and an esthetician program she did complete. Although
she earned her professional license from the second program, she lacked
the resources to maintain the license. Her debt grew to $27,000 and because
the loans were in deferment or forbearance, had never made a payment.
Because there is no statutory definition of undue hardship, courts commonly
rely on tests to determine a debtor’s ability to maintain a minimum
standard of living when forced to repay a loan, whether the circumstances
that prevented them from paying a debt are expected to continue, and whether
they have made efforts in good faith to repay the debt. In this particular
case, the court utilized a less-restrictive test – the “totality
of the circumstances” test, which considers:
- A debtor’s current financial resources, as well as past financial
resources and reasonably expected future financial resources;
- A debtor’s necessary and reasonable living expenses; and
- Any relevant facts or circumstances inherent to their debt, finances, and case.
The debtor in this case met the first two elements of the test because,
although she searched for a higher paying job, was unable to find better
employment and because her monthly expenses were reasonable and necessary
for her given situation. However, determining the weight of other relevant
facts required closer evaluation, especially in light of the Education
Department’s argument that she would not have to make month payments
– or pay $0 a month – under a repayment plan she was eligible for.
In rejection of this argument, the court cited other “costs”
associated with the repayment plan, which although touted a $0 per month
payment, also resulted in accrued interest during the repayment period,
a potential negative impact on credit, housing, and employment, tax consequences
upon cancellation, and – most notably – the emotional cost
associated with the debt itself. In its ruling, the court cited that they
could not ignore a hardship simply because it is not “reflected
on a balance sheet,” and therefore ruled in favor of the debtor.
The decision may provide hope to former students who face incredible consequences
associated with their
student loan debt that affect more than their finances alone. It also shows that courts
may be increasingly more receptive to less restrictive definitions of
undue hardship. Still, whether student loan debt constitutes an undue
hardship remains a challenging legal issue, and one that continues to
be debated throughout the public and legal spheres.
If you have questions regarding student loan debt, our Chicago consumer
lawyers at Sulaiman Law Group, LTD. are available to help you learn more
about your rights and options.
Contact us today to speak with a member of our team.