563 B.R. 1
8th Cir. BAP2017Background
- Debtor Fern obtained multiple federal student loans (totaling > $27,000 by trial) between 2002–2007 for two training programs; she never completed the first program and later trained as an esthetician.
- Fern is a 35-year-old single mother of three, employed six years at a low-paying job with monthly take-home ~$1,506.78; household monthly income from all sources is $2,413.
- Household monthly expenses total $2,475, creating a $62 shortfall; Fern has no savings and limited child-support and family support.
- Fern never made payments on the loans; loans have remained deferred/forbearance and have not been placed in repayment.
- Bankruptcy Court found Fern’s loans dischargeable under 11 U.S.C. § 523(a)(8) as imposing undue hardship; DOE appealed.
Issues
| Issue | Plaintiff's Argument (Fern) | Defendant's Argument (DOE) | Held |
|---|---|---|---|
| Whether Fern’s student loans impose an "undue hardship" | Fern argued her income and expenses show inability to pay now or in foreseeable future; loans prevent basic financial stability | DOE argued repayment options (including income-driven plans) exist and thus no undue hardship | Court affirmed discharge under the totality-of-circumstances test — undue hardship proven |
| Proper test for undue hardship | Fern relied on totality-of-circumstances factors (Eighth Circuit approach) | DOE urged consideration of Brunner-type metrics and availability of $0 payment plans | Court applied Eighth Circuit totality test and rejected automatic dispositive effect of $0 payment eligibility |
| Weight of income-driven repayment eligibility | Fern: availability of $0 payment plan does not automatically negate undue hardship | DOE: eligibility for programs (including $0 payment) shows ability to repay without hardship | Court held program availability is relevant but not dispositive; $0 payment does not automatically preclude discharge |
| Consideration of additional circumstances (credit impact, emotional burden, accrual of interest) | Fern emphasized adverse non-financial effects and lack of foreseeable income improvement | DOE contended those factors are ancillary and insufficient to override repayment options | Court found these factors relevant and supportive under the third totality factor and affirmed discharge |
Key Cases Cited
- Long v. Educ. Credit Mgmt. Corp., 322 F.3d 549 (8th Cir. 2003) (endorsing totality-of-circumstances undue-hardship test)
- Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009) (discussing limits on discharge where debtor has marketable skills and repayment ability)
- Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) (articulating three-part test used by many circuits)
- Grogan v. Garner, 498 U.S. 279 (1991) (debtor bears burden of proving dischargeability by preponderance of evidence)
- Brown v. Am. Educ. Servs., Inc. (In re Brown), 378 B.R. 623 (Bankr. W.D. Mo. 2007) (illustrating additional relevant factors for totality analysis)
- Lee v. Regions Bank (In re Lee), 352 B.R. 91 (8th Cir. BAP 2006) (discussing relevance and limits of repayment options in undue-hardship analysis)