The 8th Circuit Bankruptcy Appellate Panel denied Kathryn Nielen’s application to discharge her student loans, and the result, although discouraging in many respects, is not all that surprising. (Nielsen vs. ACS Inc, No. 13-6034, 8th BAP 2014)  The debtor graduated high school in 1995 and went on to obtain an Associates of Science degree in biology and then a Bachelor’s of Science in Health Services Administration followed by a Masters of Business Administration degree in 2001.  At the time she filed bankruptcy she was 36 years old and married with 4 children.  The debtor claimed medical problems due to allergies and mold exposure, but the court did not believe these conditions prevented the debtor from working.

 Several factors were decisive in turning down the application to discharge her student loans:

  1. Poor Work History.  The court described the debtor’s work history as “minimal, if non-existent.”  The debtor offered many excuses for her lack of employment such as being overqualified for many jobs or lack of job experience, but the opinion suggests that the minimal work history was due to a lack of effort and not lack of opportunity. 
  2. Opportunity for Job Advancement.  The debtor’s spouse had opportunity for advancement at his employment.  In addition, the debtor’s spouse was not exploring the possibility of higher paying jobs and was not supplementing his income with part-time employment.  (Does a father of 4 children really have to take on a 2nd job to discharge student loans?  Isn’t being a father of 4 young children a full time job in itself?  The court continues a trend of chastising debtors who turn away work to tend to family matters.)
  3. Too Many Assets. The debtors had a retirement fund and equity in a home.  (Is home ownership a disqualification for student loan discharge?  Isn’t the real question whether the mortgage payment exceeds comparable rental rates?)
  4. Extra Income Available. The debtors discharged a significant amount of credit card debt they were servicing prior to bankruptcy.  Clearly the funds that were used to pay credit cards could now be paid towards the student loan debt.
  5. Significant Tax Refunds.  The debtors received $7,000 of tax refunds, much of that coming from Earned Income Credit or Child Tax Credits.  Such refunds have to be included in the calculation of the average monthly income.
  6. Family Debts were Repaid.  When funds were available to repay debts in the past the debtors opted to repay family loans instead of making payments on student loans. 
  7. Post-Trial Change of Circumstances Ignored.   Following the trial the debtor and her husband separated and divorced.  Claims of spousal abuse existed, but this information was ignored by the appeals court since it occurred after the trial.  The appeals court is limited to reviewing facts presented at trial.
  8. Self-imposed Income Limits.  The court found that the debtor’s ability to seek employment were mainly self-imposed.  Choosing to focus on raising a family, although admirable in many respects, is not well received by bankruptcy courts when seeking a discharge of student loans.
  9. Income Contingent Repayment Plan (“ICRP”).  The debtor had not applied for an income-contingent repayment plan with the Department of Education.  The student loans (36 separate loans) appear to have been federal loans available for an income based repayment and not private loans, although the opinion does not explicitly state one way or the other.  The debtor was eligible for a zero monthly payment ICRP, so no real hardship existed by denying the debtor’s application.  It is fair to say that a debtor has virtually no chance of discharging federal student loans in bankruptcy where no effort to comply with an income-based payment has been made, especially if the payment would be zero.  Private student loans, however, offer no such income based payments and for this reason are more frequently discharged in bankruptcy.
  10. Thirty-Six Separate Loans.  The debtor did not ask the bankruptcy court to evaluate each of her 36 loans for discharge separately.  In the 8th Circuit the bankruptcy courts will take a loan-by-loan analysis to determine which, if any, loans might be discharged.  Unfortunately, the debtor did not seek such an evaluation.