Last week I discussed the exceptional circumstances prong of the student loan discharge test. Remember, to discharge student loan debt you must prove an undue hardship. To prove an undue hardship exists you have the burden of showing:
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 I will discuss the third prong of this test, which examines what, if any, efforts you have made to repay your loan. This factor is the most difficult for people to satisfy and is most often where these cases fail. This factor looks to your effort to obtain employment, maximize income, and minimize expenses. In particular, this prong is very interested in whether you are doing everything you can possibly do to find a higher paying job, thus maximizing your income. This may include evidence of your efforts to seek employment with higher pay than your current job, your ongoing efforts to find employment, and efforts to find supplemental income (i.e. a second job). This analysis is going to be somewhat governed by your educational and employment background. This analysis is also going to be governed by any special or technical training you received and if moving between industries and disciplines is possible. Keep in mind, the Court is looking for reasons to make you pay the loan back.
Another consideration in this prong is your payment history, your use of forbearance/deferment options, loan consolidation efforts, and alternative payment programs like Income Based Repayment and Income Contingent Repayment. In addition to government repayment plans, the Court will examine what efforts you have made to reach some sort of alternative repayment plan with the lender. If, even under consolidated payment arrangement or other income based repayment plans, the amount to be paid each month is not realistic, the Court may find good faith efforts even without you trying the programs. In other words, the Court will not make you undertake a futile effort simply to say you tried. The core issue is have you made every good faith effort to repay the loans?
The overall theme of this discussion is best summarized by the Fourth Circuit when the Court stated: “Debtors receive valuable benefits from Congressionally authorized loans, and Congress in turn requires loan recipients to repay them in all but the most dire circumstances. This heightened standard protects the integrity of the student-loan program and prevents debtors from easily discharging their debts at the expense of the taxpayers who made possible their educations. As you can see, a tough burden to overcome under current law.
Next week I will begin a series on the discharge of tax debt in bankruptcy and the requirements necessary to discharge federal and state income taxes.