Monday, November 13, 2023

Bankruptcy: Dischargeability of Student Loans

Student loans generally are non-dischargeable debts and pass through the bankruptcy process unaffected. Congress has provided that government-guaranteed student loans are nondischargeable in bankruptcy unless the debtor can demonstrate that the repayment of such student loans would constitute an undue hardship under Bankruptcy Code 523(a)(8). However, there are exceptions that allow for dischargeability. In the next edition of Creditor News we will review three cases to examine the application of Bankruptcy Code §523(a)(8) concerning the dischargeability of student loans.

The first case is Murphy v. CEO/Manager, Sallie Mae, heard by the United States Bankruptcy Court at Norfolk, Virginia. In Murphy the court found as fact that the debtor’s nine year old daughter was permanently disabled, as she suffered from Pfeiffer syndrome. This disability caused the debtor to discontinue her medical education. It also impeded the debtor’s ability to work. The loans in question totaled $58,000.00, on which no payments were ever made. However, the debtor’s husband earned $82,000.00 annually. Further, the debtor’s evidence illustrated a monthly family disposable income of $400.00. The debtor argued that the family’s net disposable income was not available to repay her student loans because she and her husband had a savings account in the event that he was laid off. At the time of the bankruptcy, the account had $2,500.00. The court further noted that based upon the debtor’s testimony that her son was changing from private school to public school, it was logical to presume that there was an additional $507.00 per month available from the savings in private school tuition plus an extra $109.00 per month paid on an automobile that would be available for student loans. Eliminating these household expenses and adding these to the $400.00 already noted as per month disposable net income to pay toward the student loan debt.

The Court stated that it was doubtless that the debtor’s burden of caring for her disabled child was immeasurable, and her disappointment in her inability to complete her medical education immense. However, discharge of a student loan must be founded on more than notions of fairness or sympathy. Because of the debtor’s husband’s successful employment, the debtor and her dependents enjoyed an income well in excess of nearly all who seek undue hardship discharge, and a substantially more comfortable lifestyle than the minimal one contemplated by the criteria for a hardship discharge. Accordingly, the court found that the student loans were non-dischargeable, and thus denied the debtor’s motion to discharge her student loans due to hardship under Bankruptcy Code §523(a)(8).

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