By: Joseph Wales
St. John’s University School of Law
American Bankruptcy Institution Law Review Staff
In general, a student loan may not be discharged under title 11 of the United States Code (the “Bankruptcy Code”) unless the debtor demonstrates “undue hardship.”[1] In In re Parvizi, a bankruptcy court in Massachusetts held that a fifty-one year old debtor was required to pay back her student loans until she reached her seventies, at which time any remaining balance would be discharged.[2] The debtor, who was highly educated and had no dependents or ailments that prevented her from working, incurred student loan debt to finance her education in public health.[3] After working various jobs in public health administration, she decided to change careers and obtained a medical degree financed by additional loans, but never completed her residency program.[4] Ultimately, the debtor accumulated $653,843.22 in student loan debt from the Department of Education (D.O.E), which qualified for the Revised Pay as You Earn (REPAYE) income-driven plan.[5] Under the REPAYE plan, the debtor’s loan obligations would be limited to eighty dollars a month, but she refused to participate in the program.[6] In the face of such liabilities, the debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code and a complaint against the D.O.E seeking a discharge of her student loan debt pursuant to § 528(a) of the Bankruptcy Code.[7]
Bankruptcy Code § 523(a)(8) states that student loan debts are exempted from bankruptcy discharge unless the debt “‘would impose an undue hardship on the debtor.’”[8] With student loans, the Bankruptcy Code’s purpose to give debtors a fresh start does not automatically apply, so “’ensuring the continued viability of the loan takes precedence.’”[9] Thus, student loans are discharged only in “‘truly exceptional circumstances.’”[10] To determine whether there is an undue burden, the Parvizi court applied the “totality of the circumstances” test.[11] This test seeks to determine whether the debtor can “‘now and in the foreseeable future maintain a reasonable, minimal standard of living . . . and still afford to make payments . . . .’”[12] The court considers factors including, but not limited to, the debtor’s age, education, income, and amount of monthly payment.[13]
Here, the court concluded that the debtor’s loans should not be discharged because her ability to participate in the REPAYE program weighed heavily against the argument that the loans imposed an undue hardship.[14] However, the debtor’s eligibility for the REPAYE program would terminate in her mid-to-late seventies.[15] Although the loans will be forgiven after the program is complete, the potential tax consequences of forgiveness “would be a tremendous undue hardship” at the debtor’s age.[16] Consequently, the court found that any outstanding student loan obligation after the completion of the REPAYE program should be discharged.[17]
The court’s denial of immediate discharge reflects the general view that student loan discharges are only to be granted exceptional circumstances.[18] However, the court’s grant of a delayed discharge, in recognition that the debtor’s circumstances will markedly change, provides some flexibility to the undue burden standard consistent with the “totality of the circumstances” test.[19]
[1] See In re Parvizi, No. 18-30578-EDK, 2021 WL 1921121 (Bankr. D. Mass. May 13, 2021) at *5.
[2] See id.
[3] See id. at *1–2.
[4] See id. at *2.
[5] See id. at *4.
[6] See id.
[7] See id. at *1.
[8] Id. at *5 (quoting 11 U.S.C. § 523(a)(8)).
[9] Id. (quoting Nash v. Conn. Student Loan Found. (In re Nash), 446 F.3d 188, 191 (1st Cir. 2006)).
[10] Id. (quoting Murphy v. Educ. Credit Mgmt. Corp., 511 B.R. 1, 4 (D. Mass. 2014)).
[11] Id.
[12] Id. (quoting In re Hicks, 331 B.R. 18, 31 (Bankr. D. Mass. 2005)).
[13] See id.
[14] See id. at *6.
[15] See id. at *7.
[16] Id. (quoting In re Brunell, 356 B.R. 567, 580–81 (Bankr. D. Mass 2006)).
[17] See id.
[18] See id. at *5.
[19] See id. at *7.