Failure to Apply for Income Based Repayment Does Not Bar Discharge of Student Loans

American Bankruptcy Institute Law Review Staff

 

In In re Krieger,[1] the Bankruptcy Court for the Southern District of Illinois permitted a discharge of federal student loans despite the debtor’s failure to apply for an Income Contingent Repayment Plan (“ICRP”).[2] Under an ICRP, a borrower’s annual loan payments can be reduced after applying a formula that takes into account poverty guidelines and the borrower’s adjusted gross income.[3] However, if the borrower has no discretionary income, the monthly payment due will be zero.[4] Here, the debtor, a twice divorced, fifty-two year old woman had been unemployed for over ten years despite countless attempts to secure employment.[5] She lives with her elderly mother and her sole income is a monthly government assistance check for $200.[6] She is unable to afford health or dental care, a cellular phone, or her car payments.[7] The court held that application for an ICRP would be nothing more than a formality because the debtor was currently destitute, and was likely to remain that way for rest of her life.[8] As such, application was not dispositive of a good faith attempt to repay her loans.[9]

 

Under section 523(a)(8) of the Bankruptcy Code, a student loan is not dischargeable unless the failure to discharge the loan will impose an “undue hardship” on the debtor or the debtor’s dependents.[10] Congress enacted the undue hardship standard to combat fraud and abuse by student borrowers, but failed to define what constitutes undue hardship.[11] Most circuits have adopted the Second Circuit’s three-prong test from Brunner v. New York State Higher Education Services Corporation[12] to define the term.[13] The relevant prong in Krieger was the third, good faith, prong of the test.[14] While the court looked at the debtor’s “efforts to ‘obtain employment, maximize income and minimize expenses,’”[15] it focused particularly on whether the fact that the debtor had not applied for an IRCP indicated a lack of good faith efforts to repay her loans.[16] The court concluded that it did not, because the debtor was unlikely to find gainful employment in the future or otherwise lift herself out of poverty.[17] Thus, even if she had applied for some type of structured repayment plan, her monthly payments would have been zero.[18] 

 

In its reasoning, the Krieger court cited decisions from other courts, which also held that a debtor’s failure to take ICRP’s into account was not dispositive.[19] However, numerous other courts have found structured repayment plans, such as ICRP’s, mandatory regardless of the debtor’s scant income or future job prospects.[20] In fact, some courts have gone as far as stating that application for some sort of structured repayment plan is actually a factor of the good faith prong.[21] Although recent decisions in this area of law as a whole are hardly indicative of an emerging standard regarding the discharge of student loans during bankruptcy, this case may indicate an immerging trend of leniency in the Central District of Illinois.[22]

 

 

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