BAP Takes Repubican Approach to Undue Hardship Analysis
Where there is little likelihood that the debtor will be able to pay her students loans now or in the future , the fact that an income-based repayment plan may be available does not automatically constitute an “ ability to pay .” Fern v . FedLoan Servicing , No . 16-6021 ( B . A . P . 8th Cir . Feb . 7 , 2017 ).
Sara Fern is a 35 year-old single mother of three who receives food stamps and rental assistance and has a monthly employment income of $ 1,507 . While she receives occasional financial help from her mother , that assistance is expected to end when her mother retires . Her expenses exceed her income by $ 62 / month . Ms . Fern has student loans totaling over $ 27,000 which have been in forbearance or deferment ever since she left school . The U . S . Department of Education appealed the bankruptcy court ’ s finding that Ms . Fern ’ s student loans were dischargeable based on undue hardship under section 523 ( a )( 8 ).
The Eighth Circuit has explicitly rejected the oft-used Brunner test for undue hardship in student loan cases . Instead that circuit applies a flexible totality-of-the-circumstances test under which it looks to “( 1 ) the debtor ’ s past , present , and reasonably reliable future financial resources ; ( 2 ) a calculation of the debtor ’ s and her dependent ’ s reasonable necessary living expenses ; and ( 3 ) any other relevant facts and circumstances surrounding each particular bankruptcy case .” Under the third factor a court may address a number of considerations such as , whether the debtor has made a good faith effort to repay the loans , the extent to which her financial situation is within her control , and whether she has negotiated deferments or forbearances with respect to the loans .
Addressing these factors in turn , the bankruptcy panel found that : 1 ) Ms . Fern ’ s income has been steady and is unlikely to change , and 2 ) the bankruptcy court correctly found that Ms . Fern ’ s expenses are modest and
reasonable . With respect to the broad considerations in the third factor , the court rejected the USDE ’ s contention that because Ms . Fern could avail herself of a income-based repayment plan which would not require any monthly payments , she can “ afford ” the debt . In so holding , the panel distinguished Educ . Credit Mgmt . Corp . v . Jesperson , 571 F . 3d 775 ( 8th Cir . 2009 ), in which the court found that the debtor should have negotiated an income-contingent repayment plan with the student loan creditor . There , the court was persuaded by the facts that the debtor had a law degree , no dependents , had self-imposed restrictions on his income and had not attempted any loan repayments despite an ability to devote some income to those debts . Rather , the panel in Fern agreed with the bankruptcy court ’ s finding that factors such as the emotional burden of the debt , the negative credit effect of the loans and the potential tax obligation when a repayment plan would expire ,
“ The U . S . Department of Education appealed the bankruptcy court ’ s finding that Ms . Fern ’ s student loans were dischargeable based on undue hardship under section 523 ( a )( 8 ).” all militated against requiring Ms . Fern to enter into an income-based repayment plan . The panel affirmed the bankruptcy court ’ s finding that the loans presented undue hardship and were subject to discharge .