BAP Takes Realistic Approach to Undue Hardship Analysis

Posted by NCBRC - February 21, 2017

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, 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.

Fern BAP8th opinion Feb 2017


One Comment

  • Posted February 27, 2017 at 1:12 am | Permalink

    I tried a case on a student loan debt with similar facts a few years ago in the bankruptcy court Northern District of Ohio Inre Lamento before Judge Morgenstern-Clarren. We won the case! A very thoughtful decision.. May be helpful to practitioners fighting this difficult issue

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