Reading the opinion just issued by the Bankruptcy Appellate Panel for the 8th Circuit in the case of Shaffer vs. Iowa Student Loan Liquidity Corporation, I am wondering if we are now witnessing a greater willingness of the bankruptcy courts to discharge student loans.
Susan Shaffer is a single woman in her 30s with no dependants. She apparently suffers from mental health issues including eating disorders, depression, anxiety and self-harm (cutting). She acquired $204,525 of student loans while obtaining a degree in psychology in 2002 and attending chiropractic school before dropping out in 2008. She worked for a time as a revenue specialist before leaving that job after suffering bouts of depression. After filing bankruptcy she found employment in the radiation oncology department at the University of Iowa.
Student loans are not dischargeable in bankruptcy unless they would impose an undue hardship on the debtor or the debtor’s family. (Bankruptcy Code Section 523(a)(8)). The debtor must file an Adversary Proceeding against the student loan provider in the bankruptcy case and has the burden of proving the hardship by a preponderance of the evidence.
Bankruptcy courts in the 8th Circuit apply a Totality of the Circumstances Test and look at several factors in considering whether the debt imposes an undue burden. These factors include:
- The debtor’s past, present and reasonably reliable future financial resources.
- A calculation of the reasonable living expenses of the debtor and his or her dependants.
- The age of the debtor.
- The mental and physical health of the debtor.
- Whether the debtor has participated in an Income Contingent Repayment Program (ICRP).
- Whether the debtor has retirement accounts or equity in a home or other assets.
What is odd about the Shaffer decision is that this debtor was relatively young, well educated, had no dependants, and despite her problems with depression, she had no significant physical disability. In addition, the debtor did not participate in any type of income contingent repayment program, and she had only been out of school for a short period of time before filing bankruptcy. Wasn’t it a bit premature for the court to declare that the debtor would never be able to repay any of the debt when she still has about 30 to 40 more working years ahead of her?
Contract the Shaffer case with the opinion issued in the Erik and Kathryn Nielsen case issue by the 8th Circuit BAP court in July of 2012. In that case a couple with four young children were denied a discharge of $48,361of student loan debt despite an annual income of $30,000. The Nielsen’s received $316 of monthly Food Stamps and about $8,000 of taxes refunds. Erik Nielson suffered from a variety of work injuries including two broken wrists and was unable to work outside in cold weather or to handle large ladders in his job as a service technician. The appeals court dwelled on the fact that the debtors had not applied for the income contingent repayment program and Kathryn Nielsen was not employed outside the home despite having a masters degree. The court noted that under an ICRP the debtors would have to make no payment on the student loans until their income increased to over $55,000 per year.
Which set of debtors had the greater hardship? The married debtors earning $30,000 per year with four young children or the single debtor with similar income and no kids and no physical limitations but who suffers from depression? It is hard to reconcile this difference.
Last year the 8th Circuit discharged $300,000 of student loans for a married couple in their mid 40s with five minor children, two of whom were diagnosed with autism. In re Walker, 650 F.3d 1227 (2011). Mrs. Walker had attended medical school but never passed the state licensing exam and later went on to obtain a degree in school psychology. Mr. Walker was employed as a police officer earning about $60,000 per year. Despite their eligibility for an ICRP payment of $593.98 per month and despite obtaining a $40,000 Chevrolet Suburban SUV loan costing $850 per month and obtaining a $48,000 second mortgage to install a screened deck costing $373.52 per month just shortly before filing bankruptcy, the 8th Circuit discharged the student loan debt. The court stated that the “apparent contradictions in this case are troubling” but finally concluded that the reality of the situation is that special needs of the two autistic children would endure for many years to come and therefore discharged the debt.
The single greatest obstacle to discharging student loan debts is the availability of income contingent repayment plans. In the absence of physical or mental health issues in the debtor’s family, the courts tend to deny applications to discharge student loan debts when debtors have failed to exercise their ICRP options. However, when physical and mental disabilities are present, I sense that the courts are more willing to weigh those factors into consideration as the Walker and Shaffer opinions demonstrate.