A federal appeals court ruled that a woman who is disabled and living below the poverty line is not eligible to have her student loans discharged in bankruptcy, because she failed to make a “good faith effort” to repay the loans.
Although she doesn’t qualify for immediate forgiveness under the U.S. Bankruptcy Code, a federal loan-consolidation program will forgive the $37,000 she holds in debt over a period of 25 years – even if she never repays a cent.
Monica Stitt is 45 years old and has been unemployed since 2008. She earns about $10,000 income per year in Social Security disability benefits and public assistance, as reported by Bloomberg. Stitt took out several student loans worth $13,250 between 1989 and 1990, according to court documents. All of her loans defaulted a couple years later. By the time Stitt filed for bankruptcy, she had accumulated $37,000 in debt.
The U.S. Bankruptcy Code allows a borrower to discharge student loans in bankruptcy only if they can prove that repaying the loan would cause “undue hardship” on their lives.
Courts use a three-part test to determine hardship. First, the borrower must prove that they would not be able to maintain a minimal standard of living while repaying the debt. Then it must be proven that the hardship will continue for a significant portion of the loan repayment period. To pass the third part of the test, the borrower must also show that they have made “good faith efforts” to repay the loan before filing for bankruptcy.
The court determined that Stitt passed the first two parts of the test, finding that even if she paid only the daily interest on her loans ($3.38 per day), she still would not meet a minimal standard of living. However, the court decided that she failed part three of the test by not making a “good faith effort” to repay her loans.
According to the opinion, Stitt made nine voluntary payments amounting to $10.00 each on her loans back in 1997. However, since then she has not made a single voluntary payment on her student loans. It was disclosed that Stitt earned $11,000 at a government-sponsored job in 2008, but did not make an effort to repay her student debt even when her “income unquestionably exceeded her expenses.”
The judge also found that Stitt failed to consider enrolling in federal loan-consolidation programs.
If she consolidates her loans, she would become eligible to repay the debt under either the Income Contingent Repayment Plan (ICR), or the Income Based Repayment Plan (IBR).
At Stitt’s current income level, her monthly payment to the Department of Education would amount to $0.00 under either an ICR or IBR plan, and after 25 years in the program her entire loan balance would be forgiven, as long as her income does not increase.
The Consumer Financial Protection Bureau estimates that there are currently 8 million Americans in default on student loan payments. Stitt’s case shows that although it can be extremely difficult to have loans discharged in bankruptcy, there can at least be some recourse.
