By MITCHELL B. WEITZMAN
One of the most significant debt obligations a person can incur, a government insured student loan, is generally non-dischargeable in bankruptcy. This applies to the borrowing student and any person co-signing or guaranteeing the loan. The sole exception is if the debtor can demonstrate “undue hardship” on the part of the debtor or his or her dependants, an extremely difficult standard to meet under federal law.
Relevant sections of the Bankruptcy Code provide, in part, that a debtor in bankruptcy will not obtain a discharge from any debt “(i) for an educational benefit overpayment or loan or made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (iii) any other educational loan that is a qualified educational loan as defined in [the Internal Revenue Code], incurred by a debtor who is an individual.”
The rationale for non-dischargeability is to motivate lenders to make educational loans widely available for a college education, highly valued by society. As the court decision discussed below notes, student loan programs afford individuals in “all walks of life the opportunity to obtain an education” and that a “well-educated society is critical to our general welfare and prosperity.” Another decision put it this way: “[i]n return for giving aid to individuals who represent poor credit risks, [federal law] strips these individuals of the refuge of bankruptcy in all but extreme circumstances.” Several court decisions have addressed “undue hardship.”
In a case in which the debtor persuaded two lower courts that she was entitled to the undue hardship exception, the United States Court of Appeals for the Fourth Circuit reversed, holding that she failed to meet the following high standard, to show: (1) she cannot maintain a minimal standard of living and repay the loans, (2) additional circumstances exist that illustrate she will not be able to repay the loans for a substantial part of the repayment period, and (3) she attempted to repay the loans in good faith. In re Sandra Jane Frushour, 433 F.3d 393 (4th Cir. 2005), the Fourth Circuit noted that “undue hardship” means more than “inability to pay one’s debts.” In that case the debtor owed $12,148 in student loan debt, was in her 40s at the time of filing bankruptcy, had a seven-year-old child for whom she received no child support, changed jobs frequently, initially making between $18,000 and $20,000 per year, and then far less, $7,000 to $10,000 per year, when the tourism industry in which she worked experienced a sharp downturn following the events of Sept. 11, 2001. At the time of her bankruptcy, she earned gross income of $998 per month, drove a used Volvo with over 250,000 miles, and had only $200 to allocate to housing per month. Even under these difficult circumstances, the appeals court held that she was not entitled to a discharge because she refused to participate in a debt-consolidation program made available through a federal program that would have required her to pay 20 percent of the difference between her gross income and the federal poverty guidelines for her family size, preferring to obtain a complete “fresh start” with no remaining payment obligations.
These facts illustrate how difficult one’s circumstances must be in order to obtain a discharge for federally insured student loan debt.
The contents of this article are intended for general informational purposes only and should not be considered legal advice. This is part of a series of monthly articles by Jackson & Campbell on legal issues of interest to the LBGT community. Jackson & Campbell is a full-service law firm based in Washington and with offices in Maryland and Virginia. If you have any questions regarding this article, contact Mitchell B. Weitzman at 202-457-1695 firstname.lastname@example.org. If you have any questions regarding our firm, please contact Don Uttrich, who chairs our Diversity Committee, at 202-457-4266 or email@example.com.