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The Nebraska Bankruptcy Court has ruled that a $40,913 federal student loan owed by a 67 year old debtor whose sole source of income was from Social Security retirement in the amount of $830 per month should be discharged.   In re Grimes, Case #06-81303 (2013).   In coming to its decision, the court applied the “Totality of the Circumstances Test” focusing on three factors:


  1. The debtor’s past, present and reasonably reliable future financial resources;
  2. A calculation of the debtor’s reasonable and necessary living expense; and
  3. All other relevant facts and circumstances.

The court noted that the debtor’s efforts to lower the student loan payment by applying for available Income Based Repayment (IBR) plans is a relevant factor in assessing whether the student loans place an undue burden on the debtor, but in this case the Court found that such payment options are merely one factor to consider and is not decisive.  In this case, the debtor’s income was below the Federal Poverty Guidelines and thus no payment would be required under an IBR plan. 

The most difficult defense raised by federal student loan creditors when seeking a discharge of student loans is the availability of the income-based payment plans.  Debtors seeking to discharge student loans in bankruptcy face an uphill battle unless they avail themselves of these programs prior to seeking a student loan hardship discharge in bankruptcy.   However, senior debtors living on a fixed retirement income may not have the same opportunities of younger debtors to secure supplemental employment and it appears that the Court is willing to look beyond the IBR defense when those programs appear futile.