What Test Determines Whether My Student Loans Can Be Discharged in Bankruptcy?

The Bankruptcy Court will not discharge student loans unless there is no hope that you will repay them

Student loan debt is generally not dischargeable in bankruptcy. The only way to discharge your student loans is to prove that repaying them would be an “undue hardship.” It’s not enough to have a difficult time making payments – it has to be nearly impossible.  Even the hope of future earnings may be enough to prevent discharge. In re Williams, 492 B.R. 79 (Bankr. M.D. Ga. 2013), a case out of Georgia, demonstrates this principle. Below are the facts.

$30,000 in Student Loan Debt

Tracy took out about $30,000 in student loans to study auto mechanics and robotics. She worked as a mechanic for a while but couldn’t afford to keep her certification current, so she found work as a city bus driver. She drove buses for 23 years. In that time, she obtained deferments and hardship forbearances for her student loans every year, so she never technically defaulted or failed to make a payment. In re Williams, 492 B.R. 79 (Bankr. M.D. Ga. 2013).

Tracy made about $1500 monthly and had $465 monthly at her disposal in SSI disability income for her son. Twenty-seven years old, an anxiety disorder with paranoia and self-mutilation prevented him from working. He would soon move to a care facility, and his disability income would cover some of the expenses. Tracy would have to cover the rest. When her son lived at home, the court found that Tracy had just $53 to spare at the end of each month after paying her bills. When he left, taking his disability income with him, her income would be almost $200 short of her expenses. Id.

To make matters worse, Tracy had a degenerative eye condition, which made it unlikely that she would be able to continue working as a bus driver. Her eyesight wasn’t good enough to obtain renewal of her certification. After 23 years of driving city buses for 40 hours per week for about $10 hourly, she was faced with the prospect of finding new employment and still had decades-old student loans looming over her head. She filed for chapter 7 bankruptcy and sought discharge of her student loans. Id.

The Court’s Test to Determine Undue Hardship

Student loans are only dischargeable in bankruptcy if repaying them would be an “undue hardship” on the debtor. In the 11th Circuit, the court uses a three-pronged test to determine whether student loan repayment will be an undue hardship:

(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.

Id. at 86, quoting Hemar Ins. Corp. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003). Under this standard, “mere present inability to repay student loans” is insufficient; the debtor must demonstrate a “certainty of hopelessness” that she will be able to repay the loans. Id. Discharge is limited to “the most dire circumstances.” Id.

A Minimal Standard of Living

A minimal standard of living is defined as a “measure of comfort, supported by a level of income, sufficient to pay the costs of specific items recognized by both subjective and objective criteria as basic necessities.” Id. quoting Ivory v. United States Dept. of Educ. (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001). The court found that Tracy lived on the bare necessities with no excessive spending. Even without attempting to repay her student loans, Tracy was going to struggle to maintain a minimal standard of living without her son’s disability income. The situation would only get worse if she did, in fact, have to find another job. Tracy satisfied the first prong of the test.

Additional Circumstances

The court looks for additional circumstances that a debtor’s hardship is “more than the normal hardship that accompanies bankruptcy.” Id. at 86. Financial inability to repay the loans for a substantial portion of the loan’s repayment period may be enough to satisfy this prong in some cases.

The court considered Tracy’s son and her vision problems under this prong and found that neither affected her future chances of being able to repay her loans. Her son was moving to a care facility; Tracy would lose the benefit of his disability income but would save some of her own expenses, so the court determined that her son would not stop Tracy from improving her financial circumstances in the future. Her vision would not be a bar, either, because she had already changed fields once (from mechanic to bus driver), so, the court reasoned, she would be able to do it again. She didn’t meet the second prong of the test.

Good Faith Efforts to Repay

The court measures this prong by “the debtor’s efforts to obtain employment, maximize income, and minimize expenses.” Id., quoting Mosley v. Mosley, 494 F.3d 1320 (11th Cir. 2007). Discharge is only allowable as a result of extenuating circumstances over which the debtor has no control. Id. Tracy did make some payments on her loans during her marriage but had no ability to pay after that. She did obtain the necessary deferrals and hardship forbearances to avoid default and that was sufficient to indicate her good faith. She satisfied the third prong.

Hardship vs. Undue Hardship

Unfortunately for Tracy, two out of three wasn’t enough. She proved to the court that repayment would be a hardship, but not an “undue” hardship. While she was unable to make any payments at the time she filed for bankruptcy, the court felt that she might be able to improve her circumstances and make payments later. She proved herself capable of finding steady work and had already changed jobs once, so the court felt that she would be able to find another position when she could no longer drive buses.

Student loans are difficult to discharge in bankruptcy. Even a glimmer of hope that you’ll be able to make some payments at some point in the future is enough to prevent discharge. Think carefully before you take out student loans; make sure you choose a field of study that will allow you to pay them back.