It is exceptionally difficult – and for many, impossible – to discharge student loans in bankruptcy. Section 523(a)(8) exempts such loans from discharge unless the debtor can show that exempting the debt from discharge will “impose an undue hardship on the debtor and the debtor’s dependants.” This is a high burden. A May 12, 208 decision out of the Bankruptcy Court for the District of New Jersey demonstrates how high that burden is. And the facts of this case call into question the soundness of the underlying policy behind 523(a)(8).
At the time she filed her case, the debtor was collecting $951 per month in unemployment benefits along with $200 in general assistance ($124 of that is paid directly for rent in her subsidized housing). She collected $120 per monthin food stamps, and her other expenses were minimal. The debtor incurred about $6,900 student loans in furtherance of a degree as a medical lab technician. After taken a number of courses, she determined that the field was not for her and while the opinion doesn’t mention it, she presumably stopped her education.
Shortly thereafter, she was involved in a car accident. As a result of the accident, she suffered from Spinal Cervical Stenosis and received cortosteroids. Her only other treatment available is surgery, but she testified that her doctors are reluctant to operate because she’s 38 years old.
After that, she worked at a variety of low-paying jobs, making a total of just over $1,500 in payments toward the loans. She was able to make the payments because she lived with her folks at a minimal expense. She eventually obtained more gainful employment as a truck dispatcher, which enabled her to move out of her parents’ house, but that only resulted in an increased strain on her finances. During this time, she sought and was granted forbearances.
Then Things Go Really Bad
In April 2003, the debtor was raped and sexually assaulted. She sought an obtained psychotherapy, but was also hospitalized for severe depression and potential suicide in 2004. She was diagnosed with major depression, recurrent, severe; generalized anxiety discovery with pain, pain discover associated with medical problems; post traumatic stress disorder; and opiod dependence in remission. At the time of the trial on the student loan dischargeability issue, she was taking prescriptions that included Vicodin for pain, and Klonopin for anxiety. She had taken other anti-depressants but she stopped using them after complications arose.
Recent medical developments included a possible eating disorder and bi-polar disorder as well as lingering side effects that are from the medication use and the station in life that she found herself. Also, recent bloodwork revealed the possibility of lymphoma or a serious blood marrow disease. Her physician opined that the debtor was unemployable based on her “comorbid of psychiatric disorders compounded by her physical problems and pain.” He offered no opinion as to her prognosis or her future employability.
The Law
New Jersey is in the Third Circuit, and the Third Circuit adopted the Brunner test. It requires that a debtor seeking dischargeability of student loans demonstrate:
1) The debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans;
2) 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) The debtor has made good faith efforts to repay the loans
The first prong of the test was easily satisfied since this was not “a situation where a little ‘belt tightening’ would enable her to repay her student loans.”
The second prong posed some difficulty since the doctor did not provide any indication as to the debtor’s future incapacity. “Since [the doctor’s] opinion of her employability is clearly in the present tense, the record is devoid of evidence that [the debtor’s] condition is likely to persist for the foreseeable future.” As we’ll see, having this information might have helped the debtor.
On the third prong, the court used this standard in determining good faith: “(1) whether the debtor incurred substantial expenses beyond those required to pay for basic necessities and (2) whether the debtor made efforts to restructure [her] loan before filing [her] petition in bankruptcy.”
The debtor testified that she did not seek any relief through the William D. Ford Direct Loan program. “[T]he failure to even explore that option makes it difficult to assess future ability to make restructured payments.” Even though she did not seek that relief, the combination of a historically modest lifestyle, sporadic payments, tragic events beyond her control and an effort…to seek a restructuring… directly through the [note holder] tips the balance in favor of a finding that [the debtor] seeks the discharge in good faith.”
The court then ruled as follows:
It is clear that [the debtor’s] multiple tribulations render her currently unable to work. It is clear that she is not the type of student loan debtor that Congress had foremost in its mind when it developed the rigorous standards for discharge of student loans. The court has great sympathy for [the debtor] and hopes that the treatments she is undergoing help ease her suffering soon. Nonetheless, this court is constrained by the statutory and case law precedents, not by generalized public policy. The Third Circuit has made clear that it is the burden of the party seeking the discharge of student loans to establish that there is little or no hope that the loans may be repaid in the foreseeable future. [the debtor] has not met that burden.
It is a little unnerving to know that if the debtor had $50,000 in credit card debt, it would have been discharged. If she had a $250,000 mortgage and could not longer afford to keep her house, the discharge would wipe that slate clean. If she owed taxes from a return filed back in 2002, those taxes would be likely discharged. But instead, she has $6,900 in student loans, and despite all of the factors considered by the court, Section 523(a)(8) says they must be paid. If Congress is going to find ways to bail out homeowners in foreclosure, it should also start rethinking the policy by Section 523(a)(8).
(I typically will identify the case to enable readers to do their own research. This decision was not selected for publication, and in light of the nature of the facts, this debtor is entitled to some privacy – notwithstanding the fact that her bankruptcy is a public proceeding. If anyone is interested in reading the case, please contact us for more information.)
Related posts:
- Student Loans: The Financial Shackles of Higher Education
- Supreme Court Rules on Student Loans and Social Security Benefits
- The US Supreme Court Rules in United Student Aid Funds, Inc. v. Espinosa
- A Closer Look at Sallie Mae
- Refinance Reality Check
Tags: Student Loans
Bill – Your articulate yet accessible description of the case and obvious compassion and respect for the debtor in this blog are truly admirable. Very well done. – Susan Grossberg