Unemployed Woman Gets $230K Student Debt Wiped Out in Bankruptcy

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By Diane Davis

A Chapter 7 debtor can get $230,000 in student loans wiped out in bankruptcy because the debt creates undue financial hardship, the U.S. Bankruptcy Court for the Northern District of Iowa held.

After considering Janeese Martin’s “past, present, and reasonably reliable future financial resources,” her “reasonable and necessary living expenses,” and other circumstances, she is entitled to a discharge, Chief Judge Thad J. Collins wrote Feb. 16.

Bankruptcy Code Section 523(a)(8) allows student loan debt to be discharged if it would impose an undue hardship on the debtor and her dependents. However, bankruptcy courts don’t allow it very often.

Although “undue hardship” isn’t defined in the Bankruptcy Code, almost all courts follow what is known as the Brunner test. But the U.S. Court of Appeals for the Eighth Circuit, which covers Iowa and other heartland states, applies a more flexible standard known as the “totality of the circumstances” test.

This test requires the court to look at the debtor’s past, present, and reasonably reliable future financial resources, reasonable and necessary living expenses, and any other relevant facts such as good faith effort to repay the loan. The Brunner test, however, requires proof that repayment of student loans would force her and her dependents below a “minimum standard” of living.

The Eighth Circuit also rejects partial discharge and adheres to an “all-or-nothing” approach. A partial discharge would mean that some, but not all of the loans could be discharged.

Martin obtained a bachelor’s degree in criminal justice and political science, a law degree, and a master of public administration. She worked as an attorney in Sioux Falls, South Dakota, for three years before she was laid off. Martin also worked a few years at a non-profit until that job ended.

She’s paid $30,000 toward her student loans over the years, and consolidated them. Her original loan balance was $48,000, but it mushroomed due to interest.

Martin, 50, lives with her husband and two adult children. He supports all of them on $39,243.

The court found it unlikely that Martin will get a job sufficient enough to make payments on her loans, and she can’t rely on her husband to satisfy that debt.

Educational Credit Management Corp. argued that discharge is unnecessary because she could enroll in an income-based repayment plan with a zero payment and get the loan canceled in 20 to 25 years.

The court rejected this argument, concluding that the tax consequences would be severe for Martin in the future. She also has made good faith efforts to repay her loans, the court said.

ECMC proposed the court discharge all but $90,000. The bankruptcy court said it lacked authority to do that.

Wil L. Forker, Sioux City, Iowa, represented Martin; Great Lakes Higher Educ. Group represented itself; Brooke Suter Van Vliet, Brick Gentry P.C., West Des Moines, Iowa, represented Educational Credit Management Corp.; Trustee Donald H. Molstad, Sioux City, Iowa, represented himself.

The case is Martin v. Great Lakes Higher Educ. Grp. (In re Martin) , 2018 BL 53989, Bankr. N.D. Iowa, No. Adversary No. 16-09052, 2/16/18 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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