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Student Loan Dischargeability: Diabetic, Permanently Disabled, Blind, Prosthetic Eye, Pancreas and Kidney Transplants, But Still No ?Undue Hardship?

By Craig Andresen, Minnesota Bankruptcy Attorney

It’s no secret that federal bankruptcy courts are reluctant to grant a bankruptcy discharge of student loans based on section 523(a)(8)’s “undue hardship” standard.  Indeed, courts have usually construed the phrase “undue hardship” narrowly, rendering it difficult to discharge student loans in bankruptcy.  However, in a recent Ohio case, the court went to unusual lengths in finding that the repayment of student loans would not create an undue hardship for the bankruptcy debtor.

The debtor in this case, Wallace v. Educational Credit Management Corp., 2010 WL 5764771 (Bky.S.D. Ohio Dec. 1, 2010), had been diagnosed with diabetes at age nine.  In 2004 he obtained a bachelor’s degree in sociology, incurring student loan debt of $32,500 in doing so.  He worked for one year after graduation, earning about $12,000.  However, his diabetes caused him to gradually become blind and was forced to leave the workforce.

The debtor’s diabetes also caused him to require dialysis and even kidney and pancreas transplants.  By 2008 he had a prosthetic right eye, was deemed legally blind, and was awarded social security disability in the amount of $811 per month.  He had not been employed since the year he left college.  He lived with his father and listed expenses of $790 per month in his chapter 7 petition.  Interest of 2.875% had cause the student loan balance to increase to $38,000.

The bankruptcy court began by observing that the “Brunner” test would be applied in determining whether the student loans were an undue hardship.  This test could be met only if the debtor could show the following:

(1) That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a signicant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the student loans.

The court held that the first prong of the Brunner test had been met, but it faltered when it came to the second prong.  The court noted that the debtor had a college degree and that “his physical condition appears to have stabilized.”  Without apparent irony, the court stated that with regard to this blind debtor, “it remains to be seen … whether he will find work or remain unemployed.”  [Italics supplied.]   This meant it was possible that the debtor might someday be able to make payments, and therefore the second prong of the Brunner test had not been satisfied.

The court recognized that was reaching a harsh result, and accordingly it declined to issue a final order of nondischargeability.  Instead, it scheduled a status conference for two years hence, at which time it could be determined whether the debtor’s employment had changed.  In the meantime, the court ordered the debtor to pay $20 per month toward his $38,000 student loan obligations

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Full post as published by Credit Law Network on March 06, 2011 (boomark / email).