Last week the bankruptcy court for the Western District of Missouri discharged $37,243 of federal student loans for Michael Abney despite the fact that he was not required to make any payment on his account under an Income Based Repayment plan (IBR). (See In re Abney)
The facts of the case are as follows:
- The debtor was approximately 40 years old.
- He attended college from 1994 to 1998 but did not graduate with a degree.
- The debtor was in good physical condition, but suffered bouts of depression stemming from child custody issues and financial problems.
- He was employed as a truck driver earning $3,063 per month.
- He paid child support of $750 per month for two children, ages 7 and 11.
- He had previously paid $11,000 of student loan payments through an IBR.
- The debtor was contributing to a voluntary retirement plan, but had only $500 saved.
- His income was not expected to increase and his living expenses were modest. He had lived out of his work truck and a homeless shelters in recent years. At the time his case was filed he rented a studio apartment for $640 per month.
- The debtor was not represented by an attorney.
In the Eight Circuit (which includes Nebraska), courts apply a “Totality of the Circumstances Test” in determining whether student loans may be discharged. As a general rule, student loans may not be discharged unless paying such debts would impose an “undue hardship” on the debtor.
The court will look at these factors when reviewing an application to discharge student loan debts:
- Total present and future incapacity to pay debts for reasons not within the control of the debtor;
- Whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment;
- Whether the hardship will be long-term;
- Whether the debtor has made payments on the student loan;
- Whether there is permanent or long-term disability of the debtor;
- The ability of the debtor to obtain gainful employment in the area of the study;
- Whether the debtor has made a good faith effort to maximize income and minimize expenses;
- Whether the dominant purpose of the bankruptcy petition was to discharge the student loan; and
- The ratio of student loan debt to total indebtedness.
A few items jump out as being remarkable in the court’s opinion. First, based on his current income the debtor was not required to make any payment under the IBR and the court believed that no significant payment would be made in the future. In addition, the debtor would eventually suffer possible income tax consequences at the end of the 25-year payment plan when the unpaid balance is treated as taxable income. In short, the court felt the IBR was futile and would only drag out the process. The court also noted that there was a substantial likelihood that the IBR would be unsuccessful since the program would be canceled if the debtor defaulted on future payments.
Holding that eligibility for a program such as IBRP ipso facto leads to denial of an undue hardship discharge would deprive the Court of the discretion granted by § 523(a)(8).
Second, the court did not object to the debtor claiming an expense for a modest retirement account. The debtor was about 40 years old and had only saved $500 for retirement. The court believed the retirement savings was necessary and should not disqualify the debtor from discharging the loans.
Third, the debtor’s child support obligations would begin to end in about 7 years. Despite the fact that this would free up income to pay student loans, the court emphasized that the debtor could not afford a car payment on his current income and that he was way behind in saving for retirement.
It appears that bankruptcy courts are becoming more willing to review student loan discharge applications these days and they are taking a more skeptical eye to the income-based repayment defenses.
Other bankruptcy commentators , such as Cathy Moran, have also written articles praising the Abney decision and call for a new approach to reviewing student loan discharge matters.
Income based repayment plans have done much to alleviate student loan stress, but it is clear that the availability of these payment plans is not always the controlling factor in student loan cases.
For help with student loans and bankruptcy, contact Sam Turco Law Offices.
Image courtesy of Flickr and Mary McGuire