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Cases of Interest

Temporary Underemployment No Basis To Discharge Student Loan Debt

William J. Becket, Partner

The Debtor filed a Complaint against student loan creditors, seeking to discharge student loan debt totaling more than $170,000. In the Complaint, the Debtor alleged she was employed at the highest paying employment available to her, and that her monthly expenses were nearly equal to her income. Therefore, the Debtor argued, she had no ability to repay her student loans and was entitled to a discharge of the student loan debt.

Upon the granting of a general discharge in a bankruptcy case, a debtor receives a discharge of most unsecured debt. However, certain unsecured debts are not automatically discharged. Among debts not automatically discharged by the general discharge are educational loans made, insured or guaranteed by a governmental unit, loans made under a program funded in whole or in part by a governmental unit or nonprofit institution, and other qualified educational loans, as defined by the Internal Revenue Code.

In order to obtain a discharge of an otherwise nondischargeable educational loan, a debtor must file a complaint and obtain a declaratory judgment that the debtor and his/her dependants would suffer "undue hardship" if the loan(s) were not discharged. Statutory law does not define undue hardship, and courts have generally adopted one of two tests to determine whether undue hardship exists. These tests are known as the Brunner test and the "totality of the circumstances" test. In this case, the controlling standard was the Brunner test.

Under the Brunner test, originally described by the Second Circuit Court of Appeals, and subsequently adopted by several other Circuits, the debtor must prove: (1) that the debtor 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.

In this case, the Debtor's primary argument appeared to be that she was presently unable to repay the loans from available income, after deduction of monthly expenses. Facts which weighed against the Debtor in her undue hardship claim included the following: 1) the Debtor was young, only 27 years old, and had no dependants; 2) the Debtor had no physical or mental disability which might effect her ability to earn income; 3) the Debtor had earned two undergraduate B.S. degrees; 4) the Debtor had no secured creditors; 5) The Debtor admitted that her prospects were improving, and that she expected a rise in income in the near future; 6) the Debtor formerly held a position with a higher salary, indicating that she was capable of earning more than she currently earned; 7) the Debtor was newly married by the time the case went to trial, and her spouse's separate income was available to contribute to household expenses; and finally, 9) the Debtor had expressed an intent to repay only student loans which her parents had co-signed as liable parties.

At trial, the court found that, after subtracting household expenses from net income, the Debtor did have significant excess income available in her monthly budget. The court noted that the addition of the Debtor's spouse's income to the household budget drastically enhanced the excess household income, thereby freeing up a significant portion of the Debtor's individual income for repayment of the student loans. The court also observed that the Debtor and her new spouse had medical insurance through their employer, and both regularly contributed to their 401k plans. The court also found certain of the Debtor's monthly expenses to be beyond "minimal", as that term is used in the Brunner test, including a gym membership, a household cleaning service, and payments on prepetition dischargeable debts.

In ruling on application of the facts to the Brunner test for determining undue hardship, the court found that the Debtor did meet the third prong of the Brunner test, because she had made a good faith effort to repay the loans by having made a number of interest payments on the loans over a period of years. However, the Court also found that the Debtor could not meet the first prong of the Brunner test because she would still be able to maintain a minimal standard of living if forced to repay the loans. The Debtor's recent marriage, and the addition of her spouse's income to the household budget, were critical to the decision, as they made a difference in the excess income the Debtor had available to repay the student loans. Finally, having failed the first prong of the Brunner test, the debtor would necessarily be unable to show that any hardship she alleged would be long-lasting (failing the second prong of the test), since the court found that undue hardship was not presently evident.

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