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Student loan debt was dischargeable on grounds of undue hardship

In Krieger v. Educational Credit Management Corporation, the courts examined the question of whether the debtor’s student loan debt could be discharged in bankruptcy under a hardship exception.

The Roberson test

Educational loans are ordinarily nondischargeable, but the Bankruptcy Code provides an exception permitting discharge where the debt imposes an undue hardship on the debtor. To determine whether undue hardship exists, the bankruptcy courts apply a three-part Roberson test, requiring the debtor to prove:

  • Inability to maintain a minimal standard of living for the debtor and the debtor’s dependents, based on current income and expenses, if required to repay the loans;
  • Additional circumstances showing that this inability is likely to persist for a significant portion of the loan repayment period; and
  • Good-faith efforts by the debtor to repay the loans.

Background and procedural history

Following a trial, the bankruptcy court decided that the Roberson test had been met and issued a discharge of the debtor’s educational debt.

The creditor appealed the ruling in the federal district court. The district court reversed, stating that the debtor could have made a more diligent search for work. The district court also decided that the debtor failed to meet the good-faith portion of the Roberson test, because she had not enrolled in a deferred payment program that had a 25-year repayment schedule. The district court found that under her current circumstances the debtor could not even afford to pay even $1 per year, but nevertheless determined that enrollment in a 25-year repayment schedule would have demonstrated the debtor’s good faith by committing to pay some portion of the education debt in the event she found employment at some future date.

The debtor appealed the ruling in the U.S. Seventh Circuit Court of Appeals.

The Seventh Circuit’s ruling

The Seventh Circuit reversed, and reinstated the discharge ordered by the bankruptcy judge.

The Seventh Circuit stated that the evidence demonstrated that the debtor lacked the capacity to pay the student loan debt now or in the foreseeable future. She had no assets and was living a subsistence life with her mother, age 75, in a rural area where few jobs were available. Between the debtor and her mother, they had only a few hundred dollars in income from monthly government programs. The debtor lacked the resources to relocate to a better area to search for employment. She also had difficulty searching for work because she did not have access to the Internet and her automobile was over 10 years old and needed repairs.

The Seventh Circuit also agreed with the bankruptcy court that these circumstances were likely to persist indefinitely in the future because the debtor lacked the type of background employers were looking for. The debtor was 53 years old and had been unemployed since she quit her job to raise a family in 1986.

The Seventh Circuit also stated that the debtor was not required to enroll in a 25-year deferred payment plan since the debtor lacked the ability to pay anything and it was unlikely that the debtor would acquire sufficient assets or income in the future.

Contact an attorney

Individuals struggling with student loan debts and possible bankruptcy are urged to seek the advice of a competent attorney, experienced in such matters, in order ensure that their legal rights are protected.