The Eight Circuit Bankruptcy Appellate Panel (8th BAP) affirmed the discharge of a $27,000 of federal student loan debt despite the fact that the debtor, Sara Fern, was eligible to pay nothing in an Income Based Repayment (IBR) plan.  See In re Fern.

The debtor is a 35 year old single mom of three children, ages 3, 11 and 16.  She originally sought a degree as an accounting clerk, but after being unable to complete the required coursework she changed studies and obtained a degree as a beautician.  After graduating she attempted to start her own business and rented space in a tanning salon, but her efforts failed. For the past 6 years she has worked for the same employer earning $1,506.78 of take-home pay.  She also receives food stamps and rental assistance but does not receive any child support. Her income has been consistent and she has no savings.  The court noted that her income is not likely to improve.

Based on these factors the Department of Education opposed the debtor’s discharge request for the reason that she qualifies for a zero monthly “payment” under an Income Based Repayment plan. The 8th Circuit has previously stated that student loans should not be discharged when a debtor can afford to make a modified payment through an income-based repayment plan.  Educ. Credit Mgmt. Corp. v. Jesperson, 571 F. 3d 775(8th Cir 2009).  The DOE argued that if the monthly income-based payment would be zero, how could the loans be a hardship?

The bankruptcy appeals court disagreed.

We do not interpret Jesperson to stand for the proposition that a monthly payment obligation in the amount of zero automatically constitutes an ability to pay.

The court distinguished the Jesperson opinion from a case involving a low-income debtor who qualifies for a zero monthly student loan payment.  The Jesperson case involved an attorney who graduated with $300,000 of student loan debt. The debtor in Jesperson was young attorney in good health with no dependents, and he had the ability to substantially increase his income. Jesperson was a case where the debtor’s self-imposed conditions limited his income. In contrast, Sara Fern was working to her full potential while raising three minor children with no assistance. And, even though a zero monthly payment does not affect a debtor’s current monthly income, it does constitute an emotional burden and it causes long-term damage to the debtor’s credit rating thus affecting the cost of borrowing for car loans, etc.

Is the 8th Circuit becoming lenient on student loans? Nobody could ever argue that the conservative judges of the 8th Circuit are lenient, but they have become more skeptical of income-based repayment plans when there is no evidence that a debtor’s income will ever change.


Image courtesy of Flickr and Chuck Falzone.