In the More Lenient Eighth Circuit, Debtors Knock Off $130,000 in Student Loans

A family with $33,600 in annual take-home pay was able to discharge all but $23,900 of $154,000 in student loans. Had the couple consolidated all of their student loans, they might have succeeded in discharging everything under Eighth Circuit law.

The husband earned an undergraduate degree in psychology but generated more income in factory work. His wife was a stay-at-home mom who took care of three children. Attempting to increase their incomes, both had gone to nursing school for one year, but they both flunked out.  

From undergraduate and nursing school, the husband had a total eight student loans aggregating some $137,000. The wife had one $17,000 student loan from nursing school.

In his July 10 opinion, Chief Bankruptcy Judge Thad J. Collins of Cedar Rapids, Iowa, explained how the wife was obligated to pay child support to a former husband who had custody of a son. In arrears on child support, Judge Collins said that her income would be garnished whenever she worked, usually as a waitress. 

Judge Collins said that the husband’s income was “unlikely to increase in a meaningful way in the future” because he lacked skills for promotion in the factory where he had worked for several years. The husband’s income “covers most of the necessary household expenses but not much more,” the judge said. 

Turning to the governing law, Judge Collins said that the Eighth Circuit does not allow partial discharge of a student loan. However, the court may analyze the dischargeability of each loan when a debtor has several.

Departing from what he called “the majority of circuits,” Judge Collins said that the Eighth Circuit employs the “totality of the circumstances” test, not the so-called Brunner test. He explained that Brunner “imposes a higher burden requiring a debtor to show that repaying her student loans would force her and her dependents below a ‘minimal standard of living.’”

In the Eighth Circuit, by contrast, Judge Collins said that the “debtors must prove, by a preponderance of the evidence, that continuing to be obligated on their student loans would impose an undue hardship.” 

Although the debtor “‘is not expected or required to implement every conceivable cost-saving measure,” Judge Collins said that the family has “some opportunities for reduction,” but “not . . . enough for [the husband] to make significant payments on all eight loans.”

The lender argued that the couple’s eligibility for an income-based repayment plan, or IRB, was the “main factor” on dischargeability because the debtors were eligible to pay nothing. 

Conceding that the IRB was “one factor,” Judge Collins turned the tables on the lender by saying that an IRB would entail “additional hardships” resulting from “continuing growth of the total debt . . . , the debtor’s inability to obtain future credit, and the mental and emotional impact on the debtor of the mounting debt.”

Applying the facts to the law, Judge Collins said “it is unlikely that [the wife] will generate enough income to pay garnishments and child support obligations and still have income left over to pay towards her student loan.” He concluded that “it is unlikely that she will ever have any disposable income to pay toward an IRB plan, or otherwise reduce household expenses or the balance of her loan.”

Judge Collins therefore ruled that the wife had “established undue hardship and thus is entitled to discharge her student loan.”

Looking at the husband’s circumstances separately, Judge Collins said that the “likelihood of a minimum material increase in [the husband’s] future income” weighs “in favor of discharging one or more of [his] loans.” 

Since there were “some opportunities for reduction” of the family’s expenses for entertainment and restaurants, Judge Collins found that the husband “could realistically have some disposable income to put toward repayment of student loans.” Still, he said, the husband’s “minimum level of disposable income . . . will not cover eight different loans.”

Judge Collins ultimately decided that the debtor could repay the three smallest loans totaling about $23,900. He discharged the remainder.

Observation: From the debtor’s point of view, they ended up with a good result. They knocked off about $130,000 in debt. Presumably, their eligibility for an IRB means they will not be paying off the remaining loan of $23,900.

Recall that the Eighth Circuit does not allow a bankruptcy court to discharge a portion of a loan. It’s all or nothing.

Had the debtors consolidated their student loans — so they came into bankruptcy with one loan, not nine — they might have prevailed on Judge Collins to discharge everything. If they are eligible, debtors in the Eighth Circuit therefore might consider consolidating their student loans before filing bankruptcy.