The following is from the American Bankruptcy Institute VOLO PROJECT, where Bill and Stacey are both Editors, sharing their expertise in Bankruptcy law with other Bankruptcy Professionals.

Walker v Sallie Mae (In re Walker) 
Summarized by William Joanis, JoanisKeenan 
8th Circuit, 11 U.S.C. § 523, Consumer Bankruptcy, Consumer Debt, Discharge/Dischargeability, Personal Bankruptcy Topics
Citation:  No. 10-2032 (8th Cir., August 18, 2011)

Ruling: Affirming the judgments of the BAP and Bankruptcy Court, the Eighth Circuit held that where a debtor's required monthly student loan repayment under the Income Contingency Payment Program (ICRP) would not allow the debtor to maintain a minimal standard of living, the loan is discharged under 523(a)(8). Applying the totality-of-circumstances analysis, the court held that repayment would constitute an undue hardship based on the status of the debtor at the time of the adversary proceeding, which was commenced several years after the general discharge, rather than looking back to the situation at the time of the bankruptcy. The court was troubled by the debtor's family vehicle payment and payments on a home improvement for a screened deck, which exceeded the amount the loan repayments would have been, but the improvident stipulation by appellant, Educational Credit Management Corporation, as to income and expenses, left the Court with no other choice, Because the debtor's household ran a substantial deficit (as per the stipulated amounts), even without the vehicle and screened porch payments, there would not be enough money to pay the full monthly required under the ICRP. Because the situation was not likely to change in the future, it would constitute an undue hardship to except the student loans from the debtor's discharge, and accordingly, the debtor was discharged from the obligation of repayment.

Procedural context: The case was appealed by the defendant student loan organizations to the Eighth Circuit, appealing adverse decisions at both the BAP and the Bankruptcy Court.

Facts: The debtor incurred substantial student loans in a failed attempt at medical school. The debtor tried other other professions and incurred additional student loans that were not included in the request for a finding of discharge. The special needs of the family did not allow the debtor to contribute to the family income in the foreseeable future. The appellant, Educational Credit Management Corporation (ECMC), stipulated to the income and expenses, which showed a significant deficit. The debtor's family was purchasing an expensive vehicle with a $850 monthly payment. They had also made a home improvements, for which they had a $375 monthly payment, $225 of which related to a screened deck. Even if the vehicle and screened porch loan payments did not exist, there would still not be enough to pay the full minimum payment under the ICRP (based on the stipulated budget), and it did not look like the prospects would improve.

Judge(s):  Wollman, Murphy, and Colloton, Wollman for the majority, Colloton concurring.

Creditors can use the ICRP as a basis for claiming that repayment of a student loan does not constitute an undue hardship, but as seen in several cases, even with the ICRP, if the loans will not be retired in the student's lifetime, this may be a basis for finding at least a prortion of the loans dischargeable. Note that the Court in the Stevenson case found the ability to disclose some but not all of the debt.  The Court in Walker, with out expressly commenting on it, had followed a line of cases that find 523(a)(8) determinations to be a declaratory judgment as to undue hardship or not, and not a vehicle for re-writing the loans, which was done here.


2011 Bankr. LEXIS 3031
Stevenson v. Educational Credit (In re Stevenson), (Bankr. Mass August 2, 2011) 

The Plaintiff, chapter 7 debtor, filed a complaint against creditor, the manager of her student loan debt, seeking a discharge of her student loan obligations, totaling $114,680.69 pursuant to Section 523(a)(8).

The Debtor argued that if she repaid her student loans she would be unable to maintain a minimal standard of living. She had not listed an $8,000 claim for unpaid income taxes. She had lived in a homeless shelter previously. The Student Loan Creditor argued that she failed to show that her future prospects are bleak enough to warrant the discharge of her student loan debt, and that her request for an exception to discharge must be rejected in view of her right to consolidate her debts under the William D. Ford Direct Repayment Loan Program (Ford Program). Although the court found that a standard of unique circumstances and good faith need not be met, the debtor was obligated to pursue the Ford Program as a remedy.

Judgment was entered in favor of the creditor and against the debtor, with the proviso that if she chose within 14 days to participate in the Ford Program and abide by the provisions of the Income Based Repayment Plan Option in good faith, the court would enter a judgment partially discharging her student loan debt remaining at the expiration of the repayment plan.

As was the case in Walker, the student was not able to pursue the profession for which the student had studied using the student loans.  This factor had long been discredited, but is reappearing in the guise of not being a test of the value of the loans, but rather another setback for the student. 


In Larson v. Dept of Ed (in re Larson) (Bankr. ND Ill. 2010), the debtor had taken college courses later in life and obtained student loans to do so. Unfortunately, the debtor lost his vision and did not graduate from the program. The debtor took advantage of the income contingent repayment plan (ICRP), which based payments on annual income, and which seems to be a key in finding a student loan dischargeable. Because of accrued interest, by 2009, the balance on the loan was $ 67,231. The debtor filed for bankruptcy and sought a discharge of the student loan.  The Court declared the loan dischargeable because of the debtor's limited income due to his blindness and other medical issues. The Court found that the debtor could not maintain, based on current income and expenses, a minimal standard of living for himself and his wife if forced to repay the loan. The Court found that 401(k) and religious contributions to be modest and reasonable under the circumstances.