Student Loans: Nondischargeability Questioned In Seventh Circuit And Beyond

Conventional wisdom says that it is nearly impossible to obtain a discharge of student loan debt in bankruptcy. Indeed, Section 523(a)(8) expressly excepts student loans from discharge, unless the exception of such indebtedness from discharge would impose an undue hardship upon the debtor. But two recent developments may signal that this bedrock principle is eroding - i.e., (i) the Seventh Circuit's affirmance of a bankruptcy court's ruling that an impoverished but otherwise healthy woman's student loan debts were dischargeable, and (ii) the recent introduction of a Congressional bill that would make it easier to discharge privately issued student loan debt.

Seventh Circuit's Decision Allowing Dischargeability

In Krieger v. Educ. Credit Mgmt. Corp., 2013 U.S. App. LEXIS 7202 (7th Cir. Apr. 10, 2013), the court of appeals examined the facts and circumstances related to a $25,000 student loan obligation owed by Ms. Krieger, a 53-year-old woman, and concluded that the bankruptcy court did not err when it determined that Krieger qualified for a hardship discharge of her student loan.

In arriving at its conclusion, the court of appeals explained that Ms. Krieger "is essentially out of the money economy and living a rural, subsistence life[,]" and her circumstances were unlikely to change at any point in the future.

While the majority opinion did not explicitly state that its decision should be of limited applicability because of Ms. Krieger's unusually dire straits, a concurring opinion did exactly that, suggesting that she should have instead been required to participate in the William D. Ford Income-Based Repayment Plan. Under such plan, a debtor is required to pay 15% of his or her discretionary income every month, with the debt being discharged after 25 years.

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