543 B.R. 601
Bankr. W.D. Mo.2015Background
- Kenneth (56) and Debra Johnson (53) filed a Chapter 7 adversary to discharge ~ $109,000 in student loans as an "undue hardship" under 11 U.S.C. § 523(a)(8). They received multiple loans from the Department of Education, ECMC and Navient; neither obtained degrees. Neither has made any post-deferment loan payments.
- Mr. Johnson works part‑time (28 hrs/wk) at a food market; Mrs. Johnson works full‑time in healthcare and regularly earns overtime. Combined gross annual income ≈ $43,000; net ≈ $33,200. Court found both could likely increase earnings (Mr. Johnson can work full time; Mrs. Johnson earns overtime).
- Both debtors have medical conditions but the court found those conditions do not significantly impair ability to work. They have one dependent (an 18‑year‑old grandson still in the household).
- Debtors previously obtained financial hardship deferments and consolidated some loans; they raised concerns about the duration of income‑based repayment and possible future tax consequences from loan forgiveness.
- Court adjusted the Debtors’ trial budget (eliminated $100 retirement and $100 emergency savings) and found a monthly surplus sufficient to cover an Income‑Based Repayment Plan (IBRP) payment; debtors made no payments despite available surplus.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether repayment of student loans would impose an "undue hardship" under § 523(a)(8) | Johnsons: repayment would impose undue hardship given age, health, limited income, and long repayment horizon under IBRP | Defendants: Debtors can participate in IBRP, have budget surplus, can increase earnings, and medical issues do not prevent work | Court: Denied discharge — no undue hardship; Debtors can afford IBRP payments and maintain minimal standard of living |
| Whether Debtors maximized income/minimized expenses | Debtors: presented budget showing limited means and necessary expenses (incl. small retirement/savings contributions) | Defendants: Debtors understate income (omitted overtime, potential full‑time work, future Social Security) and include nonessential budget items | Court: Debtors have not maximized earnings; overtime and Social Security likely; eliminated $200 in budgeted retirement/emergency savings as nonessential |
| Relevance/availability of Income‑Based Repayment (IBRP) | Debtors: IBRP payment duration and speculative tax liability from forgiveness make IBRP inadequate relief | Defendants: IBRP is available and produces affordable monthly payments; speculative tax concern is insufficient to show undue hardship | Court: IBRP available and affordable for household; speculative future tax liability not persuasive |
| Impact of medical conditions and age on ability to repay | Debtors: health and nearing retirement justify discharge | Defendants: medical conditions do not prevent work; debtors obtained loans later in life and accepted deferments, so later repayment was foreseeable | Held: Medical conditions do not significantly impair ability to work; age/retirement timing not a unique circumstance warranting discharge |
Key Cases Cited
- Long v. Educ. Credit Mgmt. Corp., 322 F.3d 549 (8th Cir. 2003) (adopts totality‑of‑the‑circumstances test for undue hardship and directs focus on ability to make payments while maintaining minimal standard of living)
- Nielsen v. Educ. Credit Mgmt. Corp., 502 Fed. Appx. 634 (8th Cir. 2013) (availability of income‑contingent repayment plans is an important factor in undue hardship analysis)