On October 30, 2012, the United States Bankruptcy Appellate Panel for the Eighth Circuit issued a new opinion regarding the subject of discharging student loans in a bankruptcy proceeding. In the matter of Shaffer v. U.S. Department of Education, No. 12-601 (8th Cir. BAP Oct. 30, 2012), the Court addressed whether or not Susan M. Shaffer should be discharged of student loan debts which totaled $204,525.00.
If you are faced with a troubling amount of student loan debt, then it is important to understand that each case is different and that there is no “magic bullet” to wiping out your student loan debts. As decided in McLaughlin v. U.S. Funds (In re McLaughlin), 359 B.R. 746, 750. (Bankr. W.D. Mo. 2007), the factors that are considered in whether or not to discharge a student loan debt in bankruptcy include:
(1) total present and future incapacity to pay debts for reasons not within the control of the debtor;
(2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment;
(3) whether the hardship will be long-term;
(4) whether the debtor has made payments on the student loan;
(5) whether there is permanent or long-term disability of the debtor;
(6) the ability of the debtor to obtain gainful employment in the area of the study;
(7) whether the debtor has made a good faith effort to maximize income and minimize expenses;
(8) whether the dominant purpose of the bankruptcy petition was to discharge the student loan; and
(9) the ratio of student loan debt to total indebtedness.
The underlying bankruptcy case originated in the United States Bankruptcy Court for the Southern District of Iowa. The Judge in her bankruptcy case heard personal testimony from Ms. Shaffer regarding the above nine factors. Of particular importance was the debtor’s apparent long history of mental illness that includes eating disorders, depression, self-harm, and anxiety. The Bankruptcy Court was convinced, after hearing the testimony, that Ms. Shaffer was truly unable to meaningfully pay back her student loan debts and that it was an undue hardship on her to NOT discharge the student loans. As a result, the Bankruptcy Court fully and completely discharged the debtor’s student loan debt.
The bottom line is that no two cases are alike and that it still remains very difficult to obtain student loan debt relief in bankruptcy. Additionally, seeking a discharge of student loan debts in bankruptcy involves litigation in almost all cases. Although obtaining a discharge is possible, it is not an easy or inexpensive process.