Bankruptcy Court Says Income Driven Repayment Should NOT Stop a Federal Student Loan Discharge

Here is another fascinating court ruling on the discharge of federal student loan debt in bankruptcy.

While the Department of Education feels a student loan should be opposed for discharge even under an undue hardship because the debtors has not attempt an income-driven repayment (IDR) plan, this case paints a different picture.

In fact I’ve seen a number of cases where the government claimed the debt should not be discharged because the debtor did not enroll in an income-driven repayment plan even though the current payment would be $0 a month. Of course the objection to that is the IDR is going to create a huge future tax liability for a debt that is not discharged. But I digress.

In a 2003 bankruptcy Adversary Proceeding the judge gave the following evaluation of the dependency of making a debtor enroll in an IDR. See BKY 02-50708, ADV 03-5011, ADV 03-5017 (Bankr. D. Minn. Jun. 30, 2003)

“The defendants do not really argue that making present or even future payments on the student loans would constitute anything other than undue hardship. The debtor has no present ability to make the scheduled loan payments, nor will he ever have that ability, given his level of education and skills, and his physical and mental disabilities. The defendants only real argument is based on the Income Contingent Repayment Plan. The defendants’ argument is nothing less than a per se rule that there can never be a discharge of a student loan for an undue hardship where the debtor is eligible for the Income Contingent Repayment Plan. This cannot be right. The Income Contingent Repayment Plan cannot trump the Congressionally mandated individualized determination of undue hardship. The Income Contingent Repayment Plan is but one factor to be considered in determining undue hardship, but it is not determinative. See In re Grawey, 2001 WL 34076376, at *4; In re Leahy, 2001 WL 34079569, at *2; In re Herrmann, 2000 WL 33961388, at *3.

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The Income Contingent Repayment Plan is not always a feasible option. It permits negative amortization; a borrower can be in the program for twenty five years or more; and even if the remaining loan balance is cancelled when the borrower completes the program without full repayment, the unpaid amount including interest is then treated as taxable income to the borrower, which may result in a large amount of nondischargeable tax debt. In re Grawey, 2001 WL 34076376, at *4 (citing In re Thomsen, 234 B.R. at 509-510). In addition, even a debtor who pays little or nothing on student loans under the Income Contingent Repayment Plan will carry the ever increasing debt for the better part of his life, eliminating or severely curtailing the debtor’s ability to incur credit in an increasingly credit driven economy.

Korhonen, as an unskilled laborer, has earned up to $500 per month from odd jobs, while his monthly expenses have consistently been in excess of $700 and will most certainly rise. Including expenses for shelter and utilities means Korhonen’s expenses will be an absolute minimum of $1,100 or $1,200 per month. Korhonen has suffered from psychological problems for most of his life. These problems have caused him difficulty interacting with individuals in a structured setting. Moreover, these problems, as well as his recent physical ailments, help to contribute to his pattern of not being able to retain employment for longer than a few months. Korhonen has consistently attempted to seek employment that is within his physical and psychological limitations, but the employment he has attained has been temporary and sporadic. It is highly unlikely that Korhonen’s psychological and physical situation will change significantly in the future. Thus, his financial resources are likely to stay limited as well. Moreover, it is doubtful that Korhonen’s student loans will ever be repaid. This fact is not disputed by the defendants. The loans would haunt him for twenty five years and then create an income liability he could not pay.

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Unlike the Income Contingent Repayment Plan, bankruptcy relief is designed to give the honest but unfortunate debtor a fresh start, and although government guaranteed student loans are meant to be more difficult to discharge than general unsecured debts, they are not meant to be impossible to discharge. Id. This debtor is exactly the type of individual that the undue hardship discharge provision was devised to benefit.


The plaintiff will never be able to make meaningful payments on his student loans and excepting them from discharge would impose an undue hardship on him.”

The Judge presented a very clear argument why the insistence by the government that enrollment in an IDR is required before a bankruptcy discharge is granted is a ridiculous position.

ECMC went on to appeal the ruling that granted the full discharge of the federal student loans. On appeal the case was dismissed.

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