At first glance it appeared that the debtor had a “slam dunk” case to receive a hardship discharge of her $140,000 student loan debt.

The debtor is a 36-year-old single mother of two disabled children, ages 11 and 12. She received no child support since her ex-husband voluntarily terminated his parental rights. She could not afford her own apartment and lived with her parents. She earned a $36,000 annual salary and did not expect any wage increases.

Obtaining a hardship discharge seemed like a no-brainer–this debtor was stuck in the mud and her student loans imposed a real and long-term financial hardship.

But the Nebraska bankruptcy court denied her application for a hardship discharge, and a closer look at the facts indicates why. (See In re Wells, Case #18-08339)

Public Service Loan Forgiveness Program.

Although the debtor had enrolled her loans into a 25-year income-based repayment program, she did not apply for the 10-year Public Service Loan Forgiveness Program even though she worked for an eligible nonprofit employer.

In fact, during the case the government attorneys offered to delay the trial to allow the debtor to apply for this program, but she declined to make an application.

Why should a bankruptcy court discharge federal student loans when a debtor can eliminate the debt in 10 years with no tax consequences through the Public Service Loan Forgiveness Program? The debtor failed to answer that question to the court’s satisfaction.

Lack of Evidence of Future Income and Living Expenses.

The court was also annoyed by a general lack of evidence presented at trial.

The debtor’s children were disabled and it appears that they might be eligible for Social Security benefits, but no evidence was supplied by the debtor as to whether an application would be made to obtain this income.

The debtor claimed her children’s needs could not be satisfied by attending the local public school and she was therefore incurring the expense of private school tuition, but no medical evidence was provided to support this position.

The debtor failed to provide any evidence indicating that higher paying jobs were not available.  No evidence of denied job applications were presented or that the debtor had maxed out her earnings capacity.

The debtor had a pending personal injury claim but no evidence was presented as to when the claim might be settled or the amount she might receive.

No medical evidence was supplied to show the necessity of certain medical expenses she incurred for her children.

In short, the debtor failed to provide evidence to support her expenses or future income potential.

Actual Expenses did not match Scheduled Expenses.

A review of the debtor’s bank statements revealed that her actual expenses differed significantly from the expenses she listed on her bankruptcy schedules. Specifically, her entertainment and recreational expenses appeared to be much higher than she reported.

Debtors seeking a hardship discharge of their student loans should expect a thorough examination of their spending activity as revealed by a close examination of their bank statements.  The bank statements and bankruptcy schedules must tell the same story.


Although bankruptcy courts have become increasingly skeptical of the eligibility for various income-based repayment programs as a bar to student loan hardship discharge applications, eligibility for the Public Service Loan Forgiveness Program is almost a certain bar to a hardship discharge.

The Public Service Loan Forgiveness Program is relatively short (10 years) and unlike other income-based programs, if successfully completed it does not result in any income tax liability.  An eligible debtor who fails to apply for this program will almost never receive a hardship discharge.


Image courtesy of Flickr and GotCredit.