The Nebraska bankruptcy court discharged student loan debts for a 50-year-old debtor raising a disabled grandson. See In re Mudd. The Court overruled the Department of Education’s argument that a debtor must work two jobs to meet her burden of showing undue hardship.

In discharging the student loans the Court pointed out several factors:

  • The debtor has never earned more than $13 per hour.
  • Prospects of higher income in the future was speculative.
  • The debtor rented a single bedroom apartment that she shared with her disabled 17-year-old grandson.
  • The debtor was eligible for a zero-payment Income Based Repayment plan with the Department of Education.
  • The debtor failed to renew the income-based program for no apparent reason.
  • The debtor had no retirement savings, pension accounts or investments of any kind.
  • The debtor had recently purchased a 2016 Nissan Rogue with payments of $414.65 per month.
  • The debtor suffered from diabetes, high cholesterol, gastro reflux disease, menopause, severe allergies and a torn rotator cuff.
  • Between 2006 and 2015 she received 26 student loans .
  • She appeared to owe in excess of $75,000 of student loans.
  • At the time of trial the debtor worked 40 hours per week earning $12 per hour and worked a part-time job as a FedEx package handler.
  • Medical bills and garnishments were the immediate cause of the bankruptcy filing.


The court applied the “Totality of Circumstances Test” used in the 8th Circuit in reviewing the application.  Three factors are considered:

  1. The debtor’s past, present and reasonably reliable future financial resources.
  2. A calculation of the reasonable living expenses of the debtor and her dependents.
  3. Any other relevant facts and circumstances.

A long review of the debtor’s income earning record indicated that this debtor was already earning at her peak capacity and that it was doubtful and speculative that her income would increase substantially beyond its present level. The debtor showed good faith in working a full-time job and part-time job to pay for basic living expenses.

The court also agreed that the debtor’s living expenses were reasonable.


The Nebraska bankruptcy court scoffed at the notion that a debtor must work two jobs before they can show good faith in discharging student loans.

At trial, DOE insinuated that Mudd must maintain two jobs to meet her burden of
showing undue hardship. It asserted that, even if Mudd obtains a higher-paying
customer service representative position where she “only” worked 40 hours per week,
she “would still have the ability in terms of time in your schedule and otherwise to work
a second job.”

A 50-year-old debtor with numerous health problems earning $12 per hour who supports a disabled grandchild must work a second job to show good faith before the court could consider issuing a hardship discharge of student loans?  That was the implied argument of the US Department of Education attorneys.


I think most observers would agree with the court’s opinion in this case.  It is extremely doubtful that a 50-year-old debtor with health problems will see an increase of income. In fact, the very sad truth is that all workers over the age of 50 have a bullseye affixed to them for “strategic layoffs.”  Older workers impose a burden on corporate health insurance premiums and younger managers typically feel uneasy managing older workers.  When you hit 50 in America’s workforce, they want you gone.

But why did the court have to suffer through a 28-page opinion? Was there any real question of a hardship?  Even if the debtor was not supporting a disabled grandson, wasn’t the fact that she was 50 years old with health problems and no savings, pension, home or prospects of higher wages more than enough to justify a hardship discharge? Why did the court struggle to balance the equities in this case?

The legal standards regarding student loan discharges were created when such loans could be discharged five years after they became due.  And since five years is a very short period of time, the standards to qualify for a special “hardship discharge” prior to the running of 5 years were very high.

But when the 2005 bankruptcy amendments were passed to eliminate student loan discharges entirely except for the hardship cases,  the courts failed to update their standards.  Courts continued to apply the very tough standards applied when discharges could automatically be granted after a student loan was five years old, and this is an error that our appeals courts have lacked the courage to address.

As I write this blog post, protestors have stormed the nation’s capital to block the vote confirming the election of President Biden and in Georgia the US Senate elections may usher in serious bankruptcy reform legislation. We may see bankruptcy reform laws passed to finally deal with crushing student loan debts.  But legislation is tricky and slow, and it is time the courts update the standards applied to define what an undue hardship means for debtors entering into their final working years with no savings or economic stability.

Image courtesy of Flickr and Bradley Weber