Although our Blog focuses more on corporate restructuring issues than individual bankruptcies, the discharge of student loan debt is a topic that seems to be an exception to that rule (see The Eternal Pursuit to Collect: Due Process Rights and Actions to Collect on a Debtor’s Defaulted Student Loans, Are You Ready for Some (Fantasy) Football? Or, Why Fantasy Football May Help You to Discharge Your Student Debt, and Being In Love Means Never Being Able To Get Your Student Loans Discharged, Or Why Stedman Graham Should Have To Pay His Student Loans). (Maybe it’s because so many of us contributors have massive student loan debt burdens that we dream of getting rid of…) Lately, it appears to be a popular topic among courts, as well.
Section 523(a)(8) of the Bankruptcy Code governs a debtor’s discharge of student loan obligations. Under this section, student loans are presumptively nondischargeable. However, there is a narrow exception if a debtor is able to show that repayment of the student loans will cause an “undue hardship” on the debtor.
Recently, two courts entered decisions on this issue within the same week. Using the same standard for “undue hardship,” the District Court for the Middle District of Alabama and the Bankruptcy Court for the District of Idaho issued largely opposite decisions based on relatively similar facts.
In ECMC v. Alexandra Elizabeth Acosta-Coniff, the bankruptcy court initially held that the debtor was able to meet the undue hardship threshold and discharge her $112,000 of student loans. However, on appeal, the district court reversed.
The debtor, a 44-year-old single mother of two racked up over $100,000 pursuing four degrees, including two master’s degrees and a PhD in special education. As a full-time public school teacher, the debtor argued that the student loans were an undue hardship, as she was underpaid with no prospects for her pay to increase in the near future.
The court used the test for undue hardship originally established by the Second Circuit. Under this test, the debtor must establish: (1) that he or she 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) that 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) that the debtor has made good faith efforts to repay the loans.”
The district court denied the debtor’s discharge of the loans based on the second factor, holding that the debtor did not satisfy her burden to show that there are additional circumstances preventing her from fulfilling her payment obligations. The court stated that this element requires evidence of not only a current inability to pay, but also of additional, exceptional circumstances, strongly suggestive of continuing inability to repay over an extended period of time. The court reasoned that the debtor chose to earn four degrees with a general understanding of the cost versus benefit analysis and her multiple, marketable degrees enabled her to seek employment with a larger pay scale. As such, her future ability to earn extra income was a realistic possibility, negating the need to discharge her student loans.
Idaho is a Go
In Elizabeth M. McDowell v. Education Credit Management Corporation, and U.S. Department of Education, the court reached the opposite conclusion under the Brunner analysis. The debtor, a 43-year-old single mother of two, owed student loans in the amount of $93,000 for undergraduate and graduate degrees. The debtor was steadily employed as a social worker, but had recently taken a $6,000 trip to South America to attend training for a career switch to photography. The debtor also financed the purchase of a motorcycle for her ex-husband.
At trial on the issue of undue hardship, the debtor’s doctor testified that her health was deteriorating, and it was likely that she would be unable to work in the near future. Due to this fact, the court found that the debtor satisfied the second prong of the Brunner test, as her health condition was an additional circumstance that would persist, or worsen, in the near future.
In discussing the third prong of the analysis, the good faith repayment effort, the court recognized that the debtor made certain financial errors in the past, such as her recent trip and motorcycle purchase. However, the court held that this did not prevent her from largely satisfying this prong, as she was otherwise attempting to live modestly while working full time. Ultimately, the court held that the debtor could discharge most of her loans, except for $10,000 to account for the spending the court found to be frivolous.
So what is the difference between these two cases? Will deteriorating health problems always be viewed as an “additional circumstance” to satisfy the second prong of the undue hardship analysis? Is it nearly impossible for healthy individuals to discharge their student loans? Is there such a thing as too much education? While we don’t know the answers to these questions, we do know that the old saying seems to ring true: mo money (owed), mo problems.