As I discussed last week, the discharge of student loan debt is very difficult and is governed by a three prong test. To prove an undue hardship and get a discharge of student loan debt, you must show:
1) That you cannot maintain, based on current income and expenses, a minimal standard of living for yourself and your dependents if forced to repay your 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 your student loans; and
3) That you have made good faith efforts to repay your student loan debt to date.
This week's discussion will focus on prong 1, the minimal standard of living prong. Please keep in mind that this article is based on United States Court of Appeals for the 4th Circuit case law. While the three prong test is essentially followed in each circuit, the way the individual circuits interpret and apply each prong varies.
As a general rule, this first prong is an analysis of whether your current income and expenses make it impossible for you to maintain a minimal standard of living and pay your student loan debt. This is generally a fact based analysis and is most often the easiest of the three prongs to satisfy. This prong is only interested in what your current conditions are and not what they might be moving forward. With that said, the expenses have to be reasonable.
There is no specific set of expenses or amounts that are permitted. As I said, it is a fact based analysis by the Court. This prong also does not require that a person live at or below the poverty line or that the IRS living expenses, used on the Chapter 7 Means Test and Chapter 13 Disposable Income Sheet, necessarily set the minimized expenses. As an example, allowed expenses include contributions to your 401(k), life insurance payments, recreation expenses, cable TV, internet, cell phones, and a variety of other expenses that may seem as unnecessary, certainly to the student loan lender. Again, the issue is not whether you live in abject poverty, but whether your current income and reasonable expenses make it impossible to maintain a minimal standard of living and pay your student loan debt. In addition, this prong is generally not interested in whether the particular expense, like your car payment, will end in the near future. Future circumstances are covered by the other two prongs.
Again, while this is generally the easiest of the three prongs to satisfy there are pitfalls. Luxury expenses or unreasonable expenses will weigh against satisfying this first prong. Again, the evaluation is based on the specific facts and circumstances of your case.
Next week we will examine what an exceptional circumstance is under prong two.
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