The U.S. Bankruptcy Appellate Panel for the Eighth Circuit (Fern v. FedLoan Servicing (In re Fern) held that a single mom of three can discharge her student loan debt in bankruptcy because it would impose an undue hardship on her family.
Typically, student loan debt cannot be discharged in bankruptcy unless the debtor can prove “undue hardship,” which is not defined in the Bankruptcy Code.
A majority of circuits follow the test adopted by the Second Circuit in Brunner v. New York State Higher Education Servs. Corp, 831 F.2d 395 (2d Cir. 1987), where 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.”
However, the Eighth Circuit follows a more “flexible approach” under a “totality of the circumstances test,” Judge Anita Louise Shodeen wrote.
The court looked at past, present, and reasonably reliable future financial resources, a calculation of reasonable living expenses, and other “relevant facts and circumstances.”
The single mom in this case had $27,000 in student loan debt and had never made a payment. She initially took classes to become an accounting clerk, but did not finish the program and switched careers, training to be an esthetician.
She received minimal or no child support from the fathers of her three children. Her monthly take-home pay from her current job was $1,506, and she received food stamps and rental assistance. Her income had been consistent and was unlikely to improve in the future, the court said.
Her monthly living expenses are reasonable, necessary and modest, the court said. Her family monthly expenses are $2,475, and her monthly income from all sources is $2,413, resulting in a $62 per month deficit.
The Department of Education argued that she qualified for a repayment program where her payment would be nothing, which would not affect her current standard of living, but the court rejected it.
A zero monthly payment obligation does not automatically mean there is an ability to pay, the court said.
Judge Robert J. Kressel and Chief Judge Arthur B. Federman joined the opinion.
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