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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For borrowers who are struggling with student loan debt, relief options are available. Many student loan borrowers are unaware that they have rights and repayment options available to them, such as postponement of loan payments, reduction of payments or even a complete discharge of the debt. It is important you contact an experienced Miami bankruptcy attorney who can advise you of all your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade & Garcia, P.A. has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade & Garcia website at www.miamibankruptcy.com.
