| TABLE 1: SUGGESTED TREATMENT OF NONPARTICIPATION IN IDR IN VARIOUS FACT SITUATIONS (BRUNNER JURISDICTIONS) | ||
| Factual Situation | Suggested Treatment of Nonparticipation in ID | |
| (1) Inability to make IDR payments while maintaining minimal standard of living. | Nonparticipation in IDR does not count against good faith if debtor would be unable to maintain a minimal standard of living while making IDR payments for a significant portion of the original repayment period. | |
| (2) IDR would extend of indebtedness. | Nonparticipation in IDR does not count against good faith if debtor would be unable to maintain an above-minimal standard of living while making IDR payments for a significant portion of the IDR repayment period. | |
| (3) Bankruptcy is commenced after five years in repayment. | Nonparticipation in IDR does not count against good faith if participation would not produce a substantial likelihood of a significant financial recovery. Nonparticipation in IDR should not count against good faith if projected IDR payment is zero. | |
| (4) Negative amortization is projected under IDR. | Factor weighing against finding that nonparticipation in IDR counts against good faith. Can be accounted for by requiring creditor to show an increased projected financial recovery to count nonparticipation in IDR against good faith. | |
| (5) IDR loan cancellation potentially creates future tax liability. | Factor weighing against finding that nonparticipation in IDR is bad faith. Issue should not be ignored on ground that tax liability is speculative. | |
| (6) Nonparticipation in IDR is because debtor did not know of IDR’s availability or of debtor’s eligibility. | If nonparticipation in IDR would not count against good faith under the principles above, reasons for debtor nonparticipation usually are not relevant. Debtor’s failure to investigate IDR can count against debtor if she loses the opportunity to participate in a viable IDR program through conduct more culpable than negligence. | |
Abstract:
A drawback of student loans is that a debtor must show “undue hardship” to discharge them in bankruptcy. An advantage of student loans is that most of them may be repaid using income-driven repayment (“IDR”) plans, under which the debtor can satisfy the obligation by paying a share of income over a specified time, even if the payments do not reduce the loan balance to zero.
This Article addresses how the availability of IDR should affect the analysis of undue hardship in student-loan bankruptcy. It reviews relevant legislative history and Supreme Court precedent and draws three principal conclusions. First, the policies supporting a fresh start in bankruptcy apply to student loans, even if participating in IDR would result in an affordable payment. Second, when student loans have been in repayment for more than five years, the only policy supporting non discharge ability is that of creditor recovery. Third, IDR should make life easier for student-loan debtors, not to increase their exposure to hardship through denial of discharge.
This Article applies these findings to several factual situations common in student-loan bankruptcy. It argues that IDR’s availability should not count against discharge if IDR would extend the repayment period and the debtor could not maintain an above-minimal standard of living during the repayment period. In bankruptcies commenced after five years of repayment, the student-loan debtor generally should receive discharge if the creditor cannot show a substantial likelihood of significant repayment, so the availability of a zero-payment IDR plan should not weigh against discharge. The possibilities under IDR of negative amortization and tax liability weigh in favor of discharge, potentially by increasing the level of expected repayment the creditor must demonstrate. The debtor’s failure to learn about IDR usually should not count against the debtor.
Commentary:
Among the interesting arguments made are that if an IDR will result in a negative amortization of the loan, that is strongly indicative of an undue hardship. This actually turns the IDR argument frequently made by the Department of Education and its servicers on its head.
The chart from p. 1329, neatly summarizes these arguments:
This is valuable refutation of the standard argument that an affordable IDR should preclude an undue hardship discharge. It would be helpful if there was also greater scholarly attention paid, however, to the flip side of the IDR Bankruptcy coin, namely whether Chapter 13 debtors should be allowed to participate in IDRs during their plan. While this has been largely accepted by the Department of Education, with the USA Bulletin article, Federal Student Loan Debt in Bankruptcy: Recent Movement Towards Income-Driven Repayment Plans in Chapter 13, this “separate classification” is still resisted by many trustees and judges.
For a copy of the Article, please see:
Help or Hardship?: Income-Driven Repayment in Student-Loan Bankruptcies
Blog comments