Ch. 7 Debtor Wins Partial Discharge of Student Loans

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May 5 — A bankruptcy court for the District of Idaho flexed its equitable muscles to fashion a ruling that mostly granted a debtor's action to have her student loans discharged, while ruling some of the debt should remain non-dischargeable.

The decision by Judge Jim Pappas questioned the policy behind the Bankruptcy Code's treatment of student loan debt — something Pappas and other bankruptcy judges have done before.

In a thorough 82-page memorandum decision, the court mostly ruled in favor of the Chapter 7 debtor, a single mother struggling with medical problems and claiming that not discharging her student loans would create a burden of undue hardship.

The court found that most of her $93,000 of student loan debt would be discharged, but that $10,000, plus interest accruing at the contract rate, would remain non-dischargeable pursuant to Section 523(a)(8) of the Bankruptcy Code.

Difficult Standard for Discharging Student Loans

As noted by the court, it is an “arduous task” to get relief from student loans in bankruptcy. Section 523(a)(8) of the Code provides that student loans are presumed not dischargeable.

However, a debtor can rebut the presumption by proving through an adversary proceeding that not “excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents.”

The Code does not define “undue hardship.” One of the seminal cases addressing that thorny question — and the authority followed in this case — is Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), which established a three-prong test for finding “undue hardship.” Pursuant to Brunner, the debtor must prove each of these elements:

  •  Based on current income and expenses, the Debtor cannot maintain a minimal standard of living if forced to repay the student loans;
  •  There are “additional circumstances” indicating that the first prong condition will persist through a significant portion of the loan repayment period; and
  •  The debtor has made good faith efforts to repay the loan.


Criticism of Statute, Case Law

Many commentators, politicians, judges and attorneys have been critical of the difficult barriers that the Bankruptcy Code sets before debtors burdened with oppressive student loan debt. But as noted by most bankruptcy courts considering the issues, any perceived problems with the statute are matters of policy, and only the Congress can effect a change there.

As to the difficult threshold created by Brunner and its progeny, bankruptcy courts are similarly bound by the circuit courts adopting that rigid standard. In this case, Judge Pappas cites his own concurring opinion in an earlier case as support for his opinion that “it is doubtful the Code's and courts' current approach to this serious problem [i.e., the prevalent condition of the nation's students taking on more debt than they can realistically expect to repay] is up to the task.”Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir. 2013).

Debtor's Case for Discharge

The debtor, a single mother, suffered from a host of medical problems which to some extent limited her earning potential. The court found that the first test was met — the debtor's monthly expenses of at least $3,600 were reasonably minimal and necessary and exceeded her net monthly income of about $2,500. The court concluded that even after considering some ill-advised financial expenditures of the debtor, her monthly expenses were extremely low considering the demands of single-parenthood.

As for the second prong, the court ruled that the debtor's ongoing medical problems — despite a lack of professional consensus regarding the proper diagnoses and prognoses — was sufficient to satisfy the requirement that there be “additional circumstances” indicating that the debtor's financial condition would persist for a substantial period.

Finally, the court concluded that the third prong (demonstration of a good faith effort to repay the debt) was satisfied by the evidence. The court found that the debtor reasonably attempted to earn a good income while living modestly, and tried to utilize loan deferral or assistance programs to help facilitate her paying her student loan obligations.

Splitting the Baby

The court noted that the creditor was correct in that a number of expenditures made by the debtor were not reasonable for determining a “minimal” standard of living, including making payments for certain expenses of the debtor's adult daughter, maintaining a recreational motorcycle with its incumbent purchase and insurance payments, taking an expensive trip abroad (even though mostly subsidized by a loan from the debtor's mother), and buying the debtor's minor son an expensive smart phone.

Rather than use these improper spending instances as examples of bad faith, the court exercised its inherent powers of equity and carved out such expenditures from the amount of the student loans it would order to be dischargeable. Importantly, the court concluded that these poor decisions of the debtor did not materially affect the bottom line of the debtor's reasonable expenses.

Ultimately, the court ordered that the debtor's foolish or poor financial decisions did not total a value of more than $10,000, so the creditor would hold a non-dischargeable claim for $10,000, plus interest at the contract rate; the remainder of the approximately $93,000 student loans would be discharged.

Stephen A. Meikle, Idaho Falls, Idaho, appeared on behalf of the plaintiff, Elizabeth M. McDowell. Thomas E. Dvorak of Givens, Pursley LLP, Boise, Idaho, appeared on behalf of defendant Education Credit Management Corporation.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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