Boston Bankruptcy Update: A Debtor seeking to discharge Student Loans under the “Undue Hardship” Test must Exhaust Income-Based and Income-Contingent Repayment Plan Options First

In general, student loans are considered long-term non-dischargeable debts.  This means, even after your Chapter 7 or Chapter 13 Bankruptcy, you still owe and will have to repay your student loans.  However, there is an exception, and it is usually used for medical and chronic illnesses, called the “Undue Hardship” test.  If a Debtor can show that repayment of student loans would prove to be an “undue hardship” then the Judge can order student loans dischargeable and no longer owing.  However, this test is difficult to meet, and first and foremost, a Debtor must exhaust his or her repayment options with the student loan holder (whether it be U.S. Dept. of Education, Sallie Mae, or a private bank or institution).  Most notably are the two repayment plan options offered for Federal student loans: (1) Income-Based Repayment; and (2) Income-Contingent Repayment.

Under a recent bankruptcy case where the judge DENIED the debtors request to declare his student loans dischargeable, the Judge determined that the debtor did not meet his burden under the “undue hardship” test because he didn’t try or exhaust these two programs for repayment first.

Where a plaintiff Chapter 7 debtor has filed a complaint for a declaration that his student loan debt to the defendant is dischargeable, the debtor has not met his burden of establishing that it would be an undue hardship for him to repay his student loan.

“To establish undue hardship under §523(a)(8), the Debtor relies primarily on his series of illnesses and chronic health challenges…. . As a matter of proof, it would be the rare case in which a Debtor’s claim of medical disability as a basis for such a discharge could be met without the testimony of a medical professional. … The Debtor merely recounted his history of illnesses and health challenges and offered medical records corroborating that history and identifying past and present treatments. There was no evidence concerning the likely impact of these conditions on the Debtor’s ability to earn income in the future. In fact, the evidence supports the opposite conclusion. The Debtor’s work history has been marked by job loss and unemployment, but in recent years the Debtor has demonstrated an ability to increase his earnings, all during times when he was suffering from the health challenges and disabilities upon which he relies as a basis for his undue hardship case. The Debtor plainly has issues with anxiety and depression, as well as joint pain. But even with these problems, the Debtor succeeded in increasing his income by the time of the trial, which was two years from the time of the filing of his bankruptcy petition. …

“The Debtor’s other basis for seeking discharge of his student loans is a rather non‐specific argument that he has not been able to find continuous and reliable work. This, he suggests, is attributable to the market for his services, to a series of unfortunate job placements, and ultimately to an extended period of unemployment. This history does not come close to establishing that he will not be able to repay his student loans without undue hardship. … By the time of the trial, the Debtor had succeeded in locating a well‐paying, full‐time job with considerable employee benefits. His family income and benefit package had risen to a level at which the Debtor should be able to survive without exposing himself and his family to undue hardship by virtue of repaying his student loans. Therefore, the Debtor’s second basis for suggesting that his student loan should be discharged is equally unavailing.

“ECMC argues that the Debtor should not prevail for another reason: he has not explained how it is an undue hardship for him to repay the loan in light of the income‐based repayment programs available to him, namely the Ford Program, including the Income Contingent Repayment Plan and the Income‐Based Repayment Plan that are available as part of the Ford Program. … Given the availability of these programs, it appears that nondischarge of the loan debt likely would not impose on the Debtor a payment obligation that is greater than his ability to pay during periods of continuing disability or recurring unemployment.”

In Re: Nargassans, Timothy Charles (Bailey, J.) (USBC) (Chapter 7 Case No. 10-12766-FJB; Adversary Proceeding No. 10-1170) (July 11, 2013).

United States Census Results Raise Median Income Level for Chapter 7 Bankruptcy Filers

As of November 1, 2012, the United States Census Borough has released updated and new median income statistics

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for each state separated by number of family members.   This is important to note because if you are considering a debt relief strategy of filing for bankruptcy, in order to qualify for the highly desirable chapter 7 case, where you receive a discharge of unsecured debt without the need to make a payment plan back to your creditors, your household income must fall below the median income for your state and family size.  This is called the Means Test.  In Massachusetts to qualify your income must be below the following:

  • Single person:             $54,475
  • Family of two:             $66,076
  • Family of Three:          $80,822
  • Family of Four:           $101,523
  • Family of Five:            $109,023

 

If you have questions about your income level, and what qualifies as income for the purposes of a bankruptcy, please feel free to call our office at (617) 742-4491.