The Federal Bankruptcy Court in Nebraska Discharged Private Student Loans
In the matter of Noelle L. DeLaet, the U.S. Bankruptcy Court for the District of Nebraska held DeLaet met her burden of proving her student loans from Discover Bank and National Collegiate Trust (collectively, the “banks”) caused her undue hardship. The court, therefore, discharged DeLaet’s student loan obligations to the banks, nearly $100,000.
Conventional wisdom holds that student loans are not dischargeable in bankruptcy. Although not impossible, it is extremely difficult to do so. Discharging student loans is governed by 11 U.S.C. § 523(a)(8), which provides that a discharge in bankruptcy does not discharge any debt for student loans “unless excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor’s dependents.” The exclusion of student loans from discharge is self-executing, that is, unless a debtor affirmatively secures a court’s express ruling that a loan is dischargeable because it imposes an undue hardship, the discharge will not include student loan debt.
Under Eighth Circuit precedent, the test for undue hardship is the totality of the circumstances, which includes: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) the debtor’s reasonable and necessary living expenses; and (3) any other relevant facts and circumstances. The debtor’s burden of proof is heavy. If the debtor’s reasonable future financial resources will cover student loan payments, while allowing a minimal standard of living, a court will not discharge the debt.
DeLaet’s background was somewhat sympathetic but probably not uncommon. She graduated from college in 2009 with degrees in fine arts and English. After graduation, she struggled to find work in her fields of study despite sending out hundreds of resumes and job applications. Shortly after graduation, she found contract work for the Nebraska Department of Health and Human Services, acting as a case worker for $12.42 to $16 per hour. She began working directly for the state in 2012, and at the time of the court’s decision, she made $17.68 per hour. She had not been seeking other employment. Her financial difficulties strained her relationships with her mother, who was a co-obligor on the loans, and her fiancé, who was hesitant t to marry DeLaet until she paid off her debts. DeLaet testified that her finances caused her anxiety, for which she took medication.
The court first considered DeLaet’s past, present, and future financial resources and found she was likely to receive only nominal raises for increases in the cost of living. The court found no evidence to support the banks’ contention that DeLaet could find greater pay using her degrees and credited DeLaet’s testimony that she was too new and unqualified to apply for a supervisory position with the Foster Care Review Board. It “simply is not the law” that a debtor must apply for every possible job, qualified or not, to prove undue hardship.
The court next examined DeLaet’s living expenses and found them reasonable. The banks challenged DeLaet’s internet bill, her cell phone charges, recycling charges, and irregular expenses, arguing they were unnecessary for a minimal standard of living. The court disagreed, finding the standard of living needed to account for DeLaet’s particular circumstances, a 28-year old employed full time sharing household expenses with her fiancé. The court noted that most of DeLaet’s dealings with the banks was online and given the dilapidated state of her car, her expenses would likely increase.
Finally, the court considered other relevant facts, mainly DeLaet’s strained emotions and relationships. The court rejected the banks’ argument that her financial situation would improve once she married because her fiancé did not want to get married while DeLaet’s student loans were outstanding. The court, therefore, did not consider her fiancé’s income.
Notably, the court found DeLaet’s government loans allowed income-based repayment and discharge within ten years, opportunities the banks did not offer, finding that DeLaet’s monthly payments on her government loans left her with no other disposable income to repay the banks’ loans. The court also noted that DeLaet tried to negotiate further forbearance or deferment agreements with the banks to no avail.
Summarizing, the court found the case boiled down to the banks’ belief that with time and a willingness to relocate, DeLaet might find a better-paying job. The court did not disagree but wondered about loan payments coming due in the interim, with interest, capitalization, and the possibility the banks would sue DeLaet to collect their debts. The court, therefore, found the loans imposed an undue burden on DeLaet and discharged them.
A copy of the court’s opinion is available here.