Student loans, although not automatically nondischargeable (i.e. not wiped out in bankruptcy), have been notoriously difficult to get rid of. This is because, in order to succeed, a debtor must show "undue hardship." But with everyone in bankruptcy suffering from financial hardship, what does this really mean? I discussed this issue in a post a few years ago, but a recent case in a Minnesota Bankruptcy court shows that this hardship can be proven, and sometimes under circumstances you would not expect.
A recent post on the Bankruptcy Law Network talks about a debtor that discharged $300,000 in student loans even though her husband had recently spent $30,000 from a second mortgage loan to put a new screened-in deck on their home and had also purchased a $40,000 luxury SUV. What is even more interesting is, all of this happened years after she obtained her bankruptcy discharge. The discharge was obtained in 2004, but the action to determine the loan dischargeable was not brought until 2007. The court held that is could consider a student loan dischargeability case even years after the underlying bankruptcy was discharged and closed. In addition, and perhaps more importantly, it determined that it was the financial circumstance in 2007, not 2004, that would determine whether there was "undue hardship."
In determining whether the debtor met this standard, the court considered of importance the following:
- the debtor's household net income was$4,355.48, while her household living expenses were $5,913.00. As such, there was no way she could make meaningful payments toward the student loans, nor could she afford to pay the student loans under an Income Contingent Repayment Plan.
- This situation would have been true even if the deck and SUV had not been purchased.
- the debtor's inability to work, due to family considerations and having to care for her autistic children. This involved her attendance at 27 to 37 hours per week of therapy for the children provided by the school district.
- it was not actually the debtor's income that was used for the luxury purchases.
What is also interesting is what the court did not consider to be of importance. The lender's argument that the fact that the debtor was making payments on the deck and SUV proved that "the money was coming from somewhere," and thus the debtor could pay on the student loans, was rejected.
Two important points should be gleaned from this decision. First, the debtor's stream of income and ability to work is considered key to the determination, not what a non-debtor spouse earns. Second, and perhaps more importantly, "undue hardship" can come about under circumstances that did not exist at the time the bankruptcy was filed, but at some time in the future. Thus people with student loans that file bankruptcy should, at the very least, consult with their bankruptcy attorney should their post-discharge financial situation change for the worse.
There is one caveat to all of this: the court ruling discussed here was not made in the District of New Jersey, nor in the Third Appellate Circuit in which New Jersey is located. It was an 8th Circuit Federal Bankruptcy Appellate Panel ruling on a Minnesota bankruptcy court order of discharge. Thus New Jerseyans should not assume that they would prevail on this point here. and should contact my office to discuss their situation Nevertheless, it is an encouraging ruling on this issue.