Get Real

On February 25, 2015, the Nebraska bankruptcy court issued a new student loan opinion that should lift the hopes of debtors overburdened by student loans.   See In re DeLaet, Case #13-04032.

What is striking about this opinion is that the court granted a discharge of student loans to a relatively young debtor in good health. The facts of the case are as follows:

  • The debtor is 28 years old and is in good physical health.
  • The debtor had no dependents and was engaged to be married.
  • She graduated from college in 2009 with a degree in Fine Arts and English.
  • She owed $169,711 of student loans.
  • $27,045 of her loans were Federal Student Loans and those loans were enrolled in an Income Based Repayment (“IBR”) plan  with the Department of Education.  None of the federal student loans were discharged.
  • $142,66 of the loans were Private Student Loans (i.e., not guaranteed by the government).
  • The debtor was unable to find work in her field of study and testified that she submitted hundreds of job applications.
  • The debtor eventually found employment as a child welfare case worker earning $17.68 per hour.
  • There were no gaps in the debtor’s employment history.  She consistently held jobs even if it was outside her area of education and took part-time jobs earning minimum wage.
  • The debtor did make payments on the private loans and sought out payment options with the private loan providers but eventually was unable to afford the payment.
  • The private student loan providers told the debtor that she was “out of options” and simply had to earn more money.
  • The debtor’s mother had co-signed her private loans.
  • The debtor’s fiance was reluctant to marry until the student loan problem was resolved.
  • The debtor sought discharge of her private loans under Bankruptcy Code section 523(a)(8).

A debtor seeking discharge of a student loan must prove that payment of the loan would impose an “undue hardship” on the debtor or the debtor’s family.  The 8th Circuit Court of Appeals applies a “Totality of the Circumstances” test to determine if an undue hardship exists.  Courts must examine the following factors when reviewing student loan cases:

  1. The debtor’s past, present, and reasonably reliable future financial resources.
  2. The debtor’s reasonable and necessary living expenses.
  3. Other relevant facts and circumstances
  4. The debtor has the burden of proving undue hardship by a preponderance of the evidence. The burden is rigorous.
  5. If the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt – while still allowing for a minimal standard of living – then the debt should not be discharged.

Educ. Credit Mgmt. Corp. v. Jesperson (In re Jesperson), 571 F.3d 775, 779 (8th Cir. 2009) (citing Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).

A thorough review of the debtor’s monthly income and expenses revealed that she had $214 left after paying basic living expenses.  She negotiated an Income Based Repayment plan with the Department of Education to pay $215 per month towards the $27,045 federal loan, leaving nothing left over to pay her private loans.

What is so striking and encouraging about this court ruling is how absolutely practical and realistic it is.   Debtors are often denied their discharge application based on unrealistic expectations of what it costs to live in a modern era.  For example, even though the creditor complained that the debtor spent $32 on internet, $93 on cell phones, $12 on recycling and $50 on miscellaneous expenses, the court balked at the suggestion that these expenses were unnecessary:

It is silly to suggest that Internet and cell phone expenses are not reasonable and necessary in this digital age. I find no fault with this category of expenses.

Student loan opinions are frequently characterized as being unrealistic and arbitrary.  Courts often seem out of touch with the economic realities facing younger families, but this decision stands out for its realism:

Ultimately, this case boils down to the Defendants’ belief that, with time and a willingness to relocate, Ms. DeLaet might be able to find a better-paying job. Well, that might be true: given time and a willingness to relocate, she “might” be able to find a better-paying job – that is probably true of any employed person – but that is certainly not a reasonably reliable future financial resource. Also, what about the payments that are coming due in the meantime? The numbers are what they are – at this time, she does not have the net income to pay the loans owed to the Defendants. So, the debt just keeps getting larger and larger with default interest and capitalization and the Defendants can sue her to try to collect their debts.

Wow, we can judge cases by what is presently realistic, not by what “might” be true in the uncertain future.  The numbers are what they are.  Let’s talk about what is actually happening, not about what might happen if the debtor was somebody else.

This is an encouraging opinion.  There is new hope for the honest but unfortunate debtor.