In re Jones, __ B.R. __ (Bankr. E.D. Pa. 2013)
Student Loans Are Tough to Shake
Student loans are permanent. The only way to get rid of them is to pay them off. Even if you file for and successfully complete bankruptcy, your student loans won’t be discharged. The exception from discharge encourages lenders to offer student loans because it protects them from discharge if the student defaults. This allows students who would not otherwise be able to afford to go to college the opportunity to get an education. The law provides one exception for debtors who are simply not capable of repaying the loans. If a debtor meets the very tough requirements to show that repaying the loans is an “undue hardship,” the court may grant discharge of her student loans.
Every Day is a Struggle
Monique had two daughters, one of whom lived at home and required constant care due to her severe ADHD. Monique worked part-time as a lunchroom aid for the Philadelphia School District and made just over $700 monthly. Her younger daughter also received almost $700 monthly in Social Security income, which helped Monique to make ends meet. Monique never graduated from high school and she wanted a better life for her daughters. She cosigned two student loans for almost $30,000 so her oldest daughter could attend college. She thought that she would not have to make payments until six months after her daughter graduated, but she misunderstood the agreement and defaulted. When one of the lenders started to garnish her wages, she filed for chapter 7 bankruptcy and asked the court to discharge the student loans.
Student loans are only dischargeable if repayment would be an “undue hardship” on the debtor and her dependents. 11 U.S.C.A. § 523(a)(8). The court evaluates the hardship caused by student loan repayment using three factors:
(1) based on current income and expenses, the debtor cannot maintain a “minimal” standard of living for himself or herself and his or 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 for the student loans; and
(3) the debtor has made a good faith effort to repay the loans.
Brunner v. New York Higher Educ. Servs. Corp., 831 F.2d 395,396 (2d Cir. 1987). If the debtor satisfies all of these factors, her student loans may be discharged. By design, it’s a difficult test to pass.
Minimal Standard of Living
The court identified the elements of a minimal standard of living as:
(1) shelter that is furnished, clean, free of pests, and climate-controlled with heating and cooling;
(2) basic utilities such as electricity, water, gas, and telephone;
(3) food and personal hygiene products;
(4) transportation or vehicles (and the ability to service and insure those vehicles);
(5) life insurance and health insurance (or the ability to pay for medical and dental expenses);
(6) modest recreation.
Id. at 6, quoting In re Ivory, 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001). The court noted that with a total income of around $1500 monthly, Monique could barely afford a minimal standard of living without making any payments toward the student loans. She hovered just above the poverty line. Id. at 7. She purchased nothing that she and her daughter didn’t need and loan payments, which would have been around $400 monthly, would have taken the food out of their mouths and the clothes off of their backs. Monique met the first element of the hardship test. Id. at 8.
The second prong of the hardship evaluation is where most attempts at discharge fail. You may not make enough money to make payments now, but if there is any hope that you’ll be able to pay in the future, your loans won’t be discharged. The debtor must prove not only that her financial situation is dire, but that it will remain so for the foreseeable future.
The court examined two additional circumstances in Monique’s case: she had never finished high school and she had to care for her special needs daughter. With so little education, Monique’s employment opportunities were very limited. She enrolled in a GED program, but she was at least four years away from earning her diploma when she filed for bankruptcy. It would be at least that long before she could even attempt to increase her income. Id. at 9.
Monique’s daughter was sixteen. When she turned eighteen, the Social Security income would go directly to her. Monique used that income to pay the rent and pay for food. If her daughter left home, she would have to live on $700 monthly. If not, Monique still wouldn’t earn her diploma for at least four years. So, the court found that Monique met the second element of the hardship test. Id. at 10. Monique would very likely never make enough money to pay an extra $400 monthly toward student loans.
Good Faith Repayment Effort
In order to obtain discharge of student loans, the debtor must “not willfully or negligently cause his own default” and his condition must stem from “factors beyond his control.” Id. at 11, quoting In re Jones, 392 B.R. 116, 130 (Bankr. E.D. Pa. 2008). The lenders argued that Monique chose to work only part time and that she made no voluntary payments, indicating a lack of good faith. The court found that she could only work part time because she had to care for her daughter. Id. at 12. Her daughter’s condition was sufficiently severe to merit Social Security income. Even at sixteen years old, she required constant supervision and care. Monique had to be at home with her daughter, which precluded her from working more hours or finding a second job.
The court also noted that Monique never had any income to spare to pay toward the student loans. Id. at 11. Even the $50 garnishment from her paycheck was an extreme hardship for Monique. She did not act out of a lack of good faith. So, she met the third element of the hardship test. Id. at 12.
At Least a Little Peace of Mind
Monique wanted only to give her children the chance for a better life. She struggled to make ends meet and she wanted them to have more peace of mind. To meet that goal, she took out $30,000 in student loans, but she couldn’t pay it back. The court recognized that forcing Monique to pay the student loans would have deprived her of the basic necessities of life. So, they granted her a discharge. You’re only eligible for a discharge of your student loans if you have to choose between making payments and buying groceries and there’s no hope that your finances will improve.