The Eight Circuit Bankruptcy  Appellate Panel denied an application seeking to discharge student loans because the debtor voluntarily quit a full-time job eight months prior to filing bankruptcy.

The debtor, Erin Kemp, is a 36-year-old single mom raising a 13-year-old daughter in Arkansas.  She obtained a psychology degree in 2010 and for the past 17 years she worked for a bank earning up to $45,000 per year.  However, eight months prior to filing bankruptcy she quit her full-time bank job due to problems with depression and anxiety and took a part-time job at Lowe’s earning $13.46 per hour. She supplemented her income by performing home daycare services as well.

The bankruptcy appeals court focused on the fact that the debtor was eligible for a zero-payment Income Based Repayment (IBR) for her student loans and that her financial problems were temporary in nature.  The court focused on the following facts:

  • The debtor’s medical problems were capable of being treated with medication and until recently the debtor had successfully worked a full time job for nearly two decades.
  • Her 13-year-old daughter would attend college in a few years and not require her financial support.
  • She voluntarily quit her full time job in favor of lower-paying jobs that offered more schedule flexibility.  Thus, the debtor as asking the court to discharge her student loans due to a lifestyle change rather than from an inability to make a payment.
  • The debtor withdrew $35,000 from her retirement plan after quitting her job and paid none of it towards the student loans.
  • The debtor reported monthly income $100 from her daycare activities but such a statement was based on her taxable income and not on the daycare’s cash flow which was closer to $600/month.

The denial of a student loan discharge in this case is not surprising.  Voluntarily quitting full-time work and cashing in a retirement account eight months prior to filing bankruptcy does not rise to the standard of an undue hardship, especially when that hardship is basically self-imposed.  Yes, depression and anxiety is a real medical problem, but there was a real chance the debtor would be able to manage her condition and return to full time work in the near future.  Debtors who create self-imposed income limits are generally not viewed favorably when it comes to student loan discharge cases.