For those truly down on their luck with student loans, a recent decision from the federal appeals court in Chicago offers some new guidance for discharging those loans in bankruptcy. In Krieger v. Educational Credit Management Corporation, the U.S. Seventh Circuit Court of Appeals found that the bankruptcy court’s findings that the student loans were discharged should be reinstated, and the U.S. District Court’s decision finding to the contrary reversed. [FN1]
The standard for evaluating the dischargeability of student loans in bankruptcy is a high one, but the appeals court’s most recent interpretation of the statute leaves open the question of just how high. More importantly, it demonstrates that the appeals court is not going to disturb the findings of the bankruptcy (trial) court, as in this case, by requiring that a student loan debtor “try harder” before agreeing to allow the discharge of their loans. It found that the record in Krieger adequately supported the bankruptcy court’s findings that the debtor’s circumstances were not likely to improve and that she had acted in good faith with regard to her student loans.
Those seeking to discharge student loans need to paint a pretty bleak picture for the bankruptcy court. There are three components to the statute for demonstrating such dischargeability:
(1) First, the debtor has to show that she cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans;
(2) Second, the debtor must demonstrate that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) Third, the debtor must show that she has made good faith efforts to repay the loans. [FN2]
In Krieger, there was no dispute that the first prong of the undue hardship standard was met. The record reflected that Ms. Krieger, age 53, resides in a rural community where there were few jobs available, and she had searched for jobs over the past decade for work in her paralegal training, without success. She lives with her 75-year old mother between whom each month they only have a few hundred dollars to meet their basic expenses. Her car is more than a decade old and needs repairs. She is too poor to move anywhere in search of better employment prospects, and without Internet access or reliable transportation is unable to search further for work. The bankruptcy court found that the other two prongs had been met also.
The District Court, in reversing the bankruptcy court, thought that Ms. Krieger could have searched harder for work, such as by accepting lesser paying jobs. The District Court also thought that she did not demonstrate good faith by failing to enroll in an income-specific deferred repayment plan before seeking discharge of her loans.
Following a standard of deferential appellate review, the Seventh Circuit found that the bankruptcy court did not apply the statute incorrectly to its findings, and that its ruling should not be disturbed. It disagreed with the District Court’s view suggesting a rule that enrollment in an income-specific deferred repayment plan was necessary in every case before demonstrating good faith. It also disagreed with the District Court’s view that Ms. Krieger could have found another job, noting the bankruptcy court’s findings that she had applied without success for an extended period of time and not held a job since 1986. Even though the District Court indicated it would rule differently, the appeals court could find no clear error in the bankruptcy court’s conclusions. [FN4]
An important observation by the Seventh Circuit with regard to its ruling was its suggestion that “hopelessness” was not necessarily the same thing as “undue hardship”:
In Roberson we boiled the three criteria down to “certainty of hopelessness.” [ . . . ] That sounds more restrictive than the statutory “undue hardship” but at all events the bankruptcy judge found that Krieger’s situation is hopeless. That may be unduly pessimistic, but a judge asked to apply a multi-factor standard interpreting an open-ended statute necessarily has latitude; the more vague the standard, the harder it is to find error in its application. The ultimate finding of “undue hardship” is neither clearly erroneous nor an abuse of discretion. [FN5]
In other words, things may unduly hard, but not necessarily hopeless. In this context, the Seventh Circuit’s decision suggests that undue hardship may not be the same as certainty of hopelessness, and that the court may be adopting more of a flexible standard with regard to evaluating undue hardship. This may mean more of a chance, and perhaps hope, for truly struggling student loan debtors to be freed from that burden.
[FN2] In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993), quoting Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2nd Cir. 1987).
[FN3] Krieger, supra FN1, at 2.
[FN4] Krieger, supra FN1, at 4-6.
[FN5] Krieger, supra FN1, at 6.