In Sept 2018, a very interesting decision was handed down by the US Bankruptcy Court for the District of Kansas. This judgment established the precedent that a student loan may be discharged in bankruptcy upon certain considerations.
Vicki Metz borrowed $16,613.73 between 1989 – 1991 in order to enable her pay for her studies at a community college. She subsequently consolidated these loans. In the years between 1994 and the date of judgment, Ms. Metz has paid a total of $14,789.02 towards this loan through Chapter 13 administration but despite these diligent payments, her loan balance has continued to rise astronomically and currently sits at over $67,000.
Ms. Metz is employed as a Community health worker and receives a modest income. It became apparent in Court that even If Ms. Metz participated in an income – based repayment program and made the maximum payment of $508 per month, she would still be unable to pay off her student loan debt in 25 years (when she would be aged 84). Paying the minimum sum under this same program ($203) would result in Ms. Metz incurring enormous tax liabilities which will accrue due to cancellation of indebtnedness income. Therefore, an income repayment program was not a viable option for Ms. Metz.
The factors considered by a Court in deciding whether a Student loan can be discharged in bankruptcy are as follows:
- Is the debtor unable to make student loan payments while maintaining a minimal standard of living?
Here the court makes an analysis of relevant factors such as: health condition of the debtor, basic needs of the debtor (rent, food, utilities, transportation costs, healthcare, light entertainment etc). in this case, the Court decided that requiring the debtor to pay anything other than the Principal would render her unable to maintain a minimal standard of living.
- Is the Debtor’s present impecunious position likely to persist during the loan repayment period?
Here, the Court considers any possible changes to the debtor’s financial situation. Such changes might be brought about by retirement, increased or decreased income, job loss etc.
- Has the debtor made a good faith effort to repay the debt?
The court will also examine the debtor’s lifestyle e.g diligent attempts to remain employed in order to enhance ability to repay debt, prior attempts made to repay debt. In the case under review, Ms. Metz was shown to have made strong attempts to discharge her indebtnedness.
Upon consideration of the above, the Court decided that ALL but the original balance of the 1994 consolidated loans i.e $16,613.73 would be discharged, this meant that Ms. Metz would only be liable to repay the above sum (over a 5-10 year period) while ALL accrued interest was discharged in bankruptcy.
This Judgment is likely to have significant impact across the country especially at a time when student loan defaults have reached crisis levels.