Can you Discharge Your Student Loan In Maryland Bankruptcy Court Due to "Undue Hardship"?
Since Congress overhauled the Bankruptcy Code in 2005, it has been presumed that it is almost impossible for student loans to be discharged in bankruptcy, except in very limited circumstances. The section of the Bankruptcy Code that applies is 11 U.S.C. 523 (a) (8) which is the section of the Code that deals with exceptions to discharge in bankruptcy. In other words, this section of the Bankruptcy Code lists the types of debts that you will still have to pay after your discharge is granted and your case is closed.
Initially, the Bankruptcy Courts strictly interpreted the term "undue hardship". The Bankruptcy Courts and the Fourth Circuit Court of Appeals reviewing those Bankruptcy Court decisions severely limited the Circuit Court "undue hardship."
The Fourth Circuit Court of Appeals, in cases between 2005 and 2008, showed a certain heartlessness in determining what was "undue hardship." Basically, the theme was "it's a hardship to prove undue hardship." In In re Spence, 541 F.3d 538 ( 4th Cir, 2008) a debtor in her "late 60s" suffering from diabetes and high blood pressure still was working to pay her bills. The Court of Appeals ruled that Ms. Spence could not show "undue hardship" because she made the decision to stay in a low paying job (as a mail clerk for E*Trade). The Court said that Ms. Spence should have been looking for a higher paying job because she received a Masters Degree 20 years before her bankruptcy. Since she wasn't looking for another job (at an age when most people were retired) she had made a choice and now was not entitled to discharge the $161,000.00 in loans that she had.
The Fourth Circuit Court of Appeals adopted the "Brunner test", from the case of Brunner v. New York State Higher Education Services (In re Brunner), 831 F.2d 395 (2d. Cir. 1987). The Brunner test has 3 parts:
(1) That the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;
(2) That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) That the debtor has made good faith efforts to repay the loans.
In Educational Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 400 (4th Cir.2005) the Court stated that "undue hardship" meant "a certainty of hopelessness". Quoting another case, the Court found that the Debtor must show an illness/ disability, no usable job skills, or the existence of a large number of dependents. Even though the Court notes that she quit her job to take care of her ailing mother, the Court criticized Ms. Frushour because "she appears to be content with her present employment as a decorative painter." Furthermore, "having a low-paying job", where she "has not actively sought higher-paying employment" meant Ms. Frushour did not have an undue hardship. In other words, since she are not making the most money that she could, you was not worthy of discharge of her student loans.
Finally, in In Re Mosko, 515 F.3d 319 (4th Cir. 2008), the Court denied discharge for student loans because the debtors had not "demonstrated a good-faith effort to obtain employment and maximize income." Ms. Mosko was a music teacher and stayed home with their four year old son during the summer. The Court said that Ms. Mosko was required to look for work. And Mr. Mosko had the nerve to be terminated from a job because of medical reasons and refused another job because the employer, illegally, wanted him to accept regular pay for overtime work. Since he chose to accept unemployment and was not working, he also failed to show good faith. If this was not bad enough, the Fourth Circuit listed all of the Mosko's bills and said, that the following expenses were not necessary and did not show good faith: "$75 for internet, $80 for cell phones, $60 for satellite television, $68 for a YMCA membership, and an undisclosed amount for cigarettes." These evil debtors had the nerve to ask for discharge of their student loans because they wasted money on internet, cell phones, TV, exercise and smokes!!
So, we see that the burden for "under hardship" is quite severe. There is one case in Maryland where a Bankruptcy Judge ruled that "under hardship" existed. In re Todd, 473 B.R. 676 (2012) involved a 63 year old debtor plagued with Asbergers' Disease, who could never successfully keep a job. Clearly, there was no possibility that the debtor was able to pay the $320,000 in student loans. The debtor represented the required level of "hopelessness", no matter if she had internet, cell phones or cable TV.
Thus, in Maryland and other courts of the Fourth Circuit (Virginia, West Virginia, North Carolina & South Carolina), you need to be found disabled by Social Security to be discharged of your student loans in a Bankruptcy case.