When You Find Yourself in a Hole, Stop Digging

A recent decision by the Eighth Circuit Bankruptcy Appellate Panel has given some ray of hope to debtors seeking to discharge student loans. Eighth Circuit courts are historically conservative, comprising the Midwest states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. However, in the case of Shaffer v. U.S Department of Education, No. 12-6010 (8th Cir.BAP Oct. 30, 2012), the Bankruptcy Appellate Panel upheld the discharge of $204,525 in student loans, and rejected a lender’s complaint that the debtor could have continued her education and sought higher-paying employment.

The debtor, an unmarried woman in her thirties, received a Chapter 7 discharge, then petitioned the bankruptcy court to discharge her student loans as an “undue hardship.” The undue hardship standard has been interpreted by bankruptcy courts as a very tough standard to meet. Essentially, the debtor must show that she cannot afford to meet her basic needs and pay her student loans, and that there is no reasonable likelihood that her situation will improve in the future.

In this case the debtor showed a pattern of depression and emotional problems. The court noted that she maked $1,600 per month, and, after paying all monthly living expenses, she had less than $100.00 left over to pay toward her student loans. The court found that this was “minimal” and not enough to make progress toward paying off the student loans.

The lender countered that during 2007 the debtor enrolled at Palmer College of Chiropractic Medicine, and voluntarily quit. Her income limitations, the lender stated, were self-imposed. The debtor countered and said that she left after thirteen months once she determined that her student loan debt was insurmountable.

The court decision cited American humorist Will Rogers, who said, “When you find yourself in a hole, stop digging.” The court noted that the debtor had good reason to leave chiropractic school – she wanted to stop going into debt. It upheld the lower court decision and discharged the student loan debt.

Student loans are notoriously difficult to discharge. If you have student loans and believe you can qualify under the bankruptcy court’s “undue hardship” standard, discuss your situation with an experienced bankruptcy attorney. Your attorney can review your finances and discuss your discharge options.

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