A divided 8th U.S. Circuit Court of Appeals panel reversed a decision allowing a Chapter 7 debtor to discharge his student loans because they found that he did not face an undue hardship despite the immense amount of the loans.
In the case of Educational Credit Management Corp. v. Jesperson (In re Jesperson), No. 07-3888 (8th Cir. 07/08/09), the debtor faced student loan debt that had grown to $363,218, an amount that could not ever be repaid in full according to a previous ruling allowing the discharge.
The court said:
"The bankruptcy court said Jesperson's work record was "besmirched by a patent lack of ambition, cooperation and commitment." At the time of trial he was earning $25 per hour and living rent free in his brother's basement. Despite this fact, he said he was looking for an apartment and antici¬pated having a monthly housing expense of $1,000. In his review of the facts, Judge Loken criticized Jesperson, stat¬ing that "a debtor making a good-faith effort to repay loans would continue to live with his brother to save money."
"The bankruptcy court, however, found that no matter how frugal Jesperson was, he was never going to be able to repay a meaningful amount of his student loan debt. Requiring him to attempt to repay such a large amount of debt would be like sentencing him to 25 years in a debtors' prison without walls, the court said, and ruled that the debt was discharged. The District Court affirmed."
The bankruptcy court also ruled that the court must consider the fact that there is an income contingent repayment plan (ICRP) available for student loans. And the bankruptcy court agreed that although the student loan debt amount was astronomical the amount of the debt should not be considered alone when decided if the student loan can be discharged in bankruptcy.
Judge Loken wrote:
"When the size of the debts is the principal basis for a claim of undue hardship, the generous repayment plans Con¬gress authorized the Secretary of Education to design and offer under the William D. Ford Federal Direct Student Loan Program become more relevant to a totality-of-the-circum¬stances undue hardship analysis."
This bankruptcy case demonstrates how income contingent repayment program (ICRP) could ironically serve as another obstacle for debtors seeking to discharge student loans in bankruptcy. Already it is extremely challenging for debtors to discharge student loans in bankruptcy unless they can prove that repaying the loans would cause an undue hardship. Since ICRP offers debtors loan forgiveness after 25 years of payments many bankruptcy courts may become more hesitant about offering debtors discharges for their student loan debts.