Frequently, the media will say something like, “Student loans are difficult to shed in bankruptcy,” or worse they’ll tell their audiences that they can’t be discharged at all. The former characterization is correct: Student loan debtors must show that denying them a discharge would constitute an “undue hardship.” What this means is not defined in the Bankruptcy Code, and it until 1998 it only applied for seven years, after which debtors could discharge their student loans like any other type of unsecured consumer debt. Congress eliminated the time limit, and in 2005, it applied the same standard to private student loans. The result is that whatever test a federal circuit uses to determine if a debtor’s circumstances constitute an “undue hardship,” ultimately it comes down to a federal bankruptcy judge making that determination.
In Susan Krieger’s case (no relation), the bankruptcy judge believed she met the standard. At 53, she lives in rural Illinois with her 75-year-old mother. She has been unable to find work despite a fruitless 10-year search and having not held a job since 1986, and she lives on government assistance with minimal transportation and even Internet access. The bankruptcy judge wrote in the original opinion, “Never has the Court seen such utter futility be the result of a debtor’s job search efforts.” Educational Credit Management Corporation (ECMC), the student loan creditor to which she owed $25,000 for a paralegal certificate, disagreed.
At issue is whether Krieger’s situation fit the Brunner test, which is the same test used in Nevada, though states in other federal circuits use different tests. The Brunner test requires the student debtor to show that:
- She cannot maintain a minimal standard of living for herself or her dependents if forced to repay the loan,
- Circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period, and
- The debtor has made a good faith effort to repay the loan.
ECMC conceded point (1), but disputed the next two points, and the federal district court agreed, stating that Krieger had not searched for work recently and that by not enrolling in the government’s Income-Based Repayment (IBR) program, she breached the “bad faith” requirement.
The 7th Circuit Court of Appeals reversed the decision, pithily opening its opinion with, “Susan Krieger is destitute.” The appeals court believed the district court read too much into the rules of the Brunner test to the extent that it lost sight of the plain meaning of “undue hardship.” It also deferred to the bankruptcy court on whether Krieger’s actions met the good faith standard. Finally, the court held that IBR’s existence does not invalidate debtors’ rights to pursue a bankruptcy discharge of student loans.
Susan Krieger’s situation is quite bleak, as evidenced by the appellate court’s pathos towards her situation. The good news, though, is it shows that some debtors can earn a victory against stubborn student loan creditors without having to go on IBR. If you have significant student loan debts, talking to an experienced Las Vegas bankruptcy lawyer will help you assess your options.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.