Bankruptcy

UNDUE HARDSHIP EXAMPLES

It is up to the court to decide whether you meet the “undue hardship” standard. Here are a few examples of successful and unsuccessful cases.

1. A 50 year old student loan borrower earning about $8.50/hour as a telemarketer was granted a discharge.  The court agreed that the borrower had reached maximum earning capacity, did not earn enough to pay the loans and support minimal family expenses and appeared trapped in a “cycle of poverty.”
2. A college-educated married couple proved undue hardship and were able to discharge their loans. They both worked, but had income barely above poverty level. The court noted that the borrowers worked in worthwhile, although low-paying careers. One worked as a teacher’s aide and the other as a teacher working with emotionally disturbed children. Even with a very frugal budget, they had $400 more a month in expenses than income. Their expenses included $100 monthly tuition to send their daughter to private school. Relatives paid for most of this and the couple testified that they objected to the public school’s corporeal punishment policy. In agreeing to discharge the loans, the court also found that the couple had acted in good faith because they asked about the possibility of a more affordable repayment plan. Not all courts are as sympathetic to borrowers who work in low-paying careers. For example, one borrower was denied a discharge because he worked as a cellist for an orchestra and taught music part-time. The court suggested that this borrower could find higher-paying work. Another court came up with the same result for a pastor. The court found that it was the borrower’s choice to work as a pastor for a start-up church rather than try to find a higher paying job.
3. A number of courts have granted discharges in cases where the borrower did not benefit from the education or went to a fraudulent school.
4. There have been mixed results when borrowers have tried to show that their financial difficulties will persist into the future. For example, one court found that a borrower’s alcoholism was not an insurmountable problem, but some borrowers have won these cases. In one case, a borrower’s testimony about her mental impairment, including evidence that she received Social Security benefits, was enough to convince the court of undue hardship. The court agreed with the borrower that her ongoing mental illness was likely to continue to interfere with her ability to work.
5. In finding undue hardship in a 2011 case, the judge found that a 58 year old and 60 year old couple’s past employment experience showed no likelihood that their financial circumstances would change for the better before they reached retirement age.  The judge also considered accrued post-bankruptcy medical expenses in the amount of $22,000. There was nothing in the record to suggest that the medical debt would be forgiven.  Both borrowers suffered from various medical ailments.  Although there was no medical expert testimony of disability, the borrower’s own testimony was sufficient to who that their health problems limited future employment prospects.
6. Most courts have found that borrowers do not have to be at poverty level income to prove “undue hardship.”  A 2014 court described a “minimal standard of living” as somewhere between poverty and “mere difficult.”
7. Many courts give a lot of weight to the availability of income-based repayment plans, but all courts so far agree that a borrower does not have to participate in an income-based plan in order to meet the undue hardship standard.  Borrowers should be prepared to argue that income-based repayment plans do not provide the same type of comprehensive relief as a bankruptcy discharge.

CHAPTER 13 and STUDENT LOANS

A case under chapter 13 is often called “reorganization.” In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district.  For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan.  You should discuss these options with a bankruptcy attorney.