Bankruptcy Court Again Finds Income Driven Repayment Plan Should Not Stop Federal Student Loan Bankruptcy Discharge

Here is another bankruptcy case from 2003 where the Court determined the fact someone could enroll or was on an Income Driven Repayment (IDR) plan was not a prevention to allowing a discharge of the federal student loans in bankruptcy.

The Court records show the Judge said:

The ICRP is Only One Factor for a Court to Consider in Determining Whether Undue Hardship Exists.

Furthermore, the availability of the ICRP cannot be a magic wand that when waved precludes discharge of a student loan debt.See Cheney v. ECMC, 280 B.R. 648, 665 (N.D. Iowa 2002) (“the William D. Ford Program is no silver bullet for student loan creditors to avoid discharge of student loan debts owing to undue hardship if the creditors . . . demonstrate that a particular debtor did in fact know about and understand such alternatives for resolving student loan debts”); Korhonen v. ECMC, 296 B.R. 492, 496 (Bankr. D. Minn. 2003).

This must especially be true where, as in this case, the debtor cannot realistically afford to make the payments required by the ICRP. See, e.g., Alderete v. ECMC, 308 B.R. 495, 507 (B.A.P. 10th Cir. 2004) (determining that the bankruptcy court gave too much weight to the existence of the ICRP where “the evidence showed that even if eligible, the Debtors could not have made their Ford Program payments”).

Courts Have Found Undue Hardship Even Where the ICRP Payment Would Be Zero.

There are numerous published cases where a debtor’s monthly payment under the ICRP would be $0.00 — obviously an amount that any debtor can pay while maintaining a minimal standard of living — yet the court found the existence of undue hardship and determined that the student loan was dischargeable. See Cheney, 280 B.R. 648 (under the 8th Circuit’s “totality of the circumstances” test); Fahrer v. Sallie Mae Servicing Corp., 308 B.R. 27 (Bankr. W.D. Mo. 2004) (“totality of the circumstances” test); Johnson v. ECMC, 299 B.R. 676, 683 *16 ( Bankr. M.D. Ga. 2003); Cota v. U.S. Dept. of Educ., 298 B.R. 408, 421 n. 16 (Bankr. D. Ariz. 2003) (“The logic of applying for a program that allows the debtor a $0 `payment’ as a precondition to a finding of a debtor’s good faith, is lost on the court.”); Korhonen, 296 B.R. 492 (“totality of the circumstances” test); Gregoryk v. U.S. Dept. of Educ., 2001 WL 1891469 (Bankr. D.N.D. March 30, 2001) (“totality of the circumstances” test); Herrmann v. U.S. Dept. of Educ., 2000 WL 33961388 (Bankr. C.D. Ill. Feb. 7, 2000); Thomsen v. U.S. Dept. of Educ., 234 B.R. 506, 512 (Bankr. D. Mont. 1999) (even though monthly payment would be zero under the ICRP, the first Brunner prong “requires simply that the Debtors show they cannot repay the loans and maintain a minimal standard of living”).

Instructive in this matter is the case of Newman v. ECMC, 304 B.R. 188 (Bankr. E.D. Pa. 2002) (considering whether summary judgment was appropriate on § 523(a)(8) complaint). The Newman debtor’s monthly payment under the ICRP would have been zero, and defendant ECMC therefore argued that the debtor’s refusal to participate in the ICRP required a finding that she was not acting in good faith. In denying ECMC’s motion for summary judgment, the Newman court stated:

[W]hile consideration of the debtor’s repayment options is one factor that a court may consider in determining “undue hardship” under the totality of the circumstances, I am unaware of any decision which holds that the availability of the William D. Ford Federal Direct Loan Program to a debtor-including its “income contingent repayment plan” option-by itself requires a finding that it would not be an “undue hardship” to repay the student loan obligation.

304 B.R. at 195. The fact that a debtor can afford the monthly ICRP payment is not dispositive as to whether she can maintain a minimal standard of living while repaying her student loan.

The Existence of the ICRP Cannot Obliterate the Bankruptcy Code’s “Fresh Start” Policy.

There were numerous reasons provided in the zero payment cases, as well as in other undue hardship cases, for considering the availability of the ICRP as merely one factor in the *17 dischargeability decision. First, the bankruptcy process is fundamentally about providing “honest but unfortunate” debtors with a fresh start. See Grogan v. Garner, 498 U.S. 279, 286-287 (1991). The Supreme Court has observed that a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy “a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). Grogan, 498 U.S. at 286.

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See Grawey v. Illinois Student Assistance Comm’n, 2001 WL 34076376, at *6 (Bankr. C.D. Ill. Oct. 11, 2001) (“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.”); Polleys, 356 F. 3rd at 1309 (“to better advance the Bankruptcy Code’s `fresh start’ policy . . . the terms of the [Brunner] test must be applied such that debtors who truly cannot afford to repay their loans may have their loans discharged”); Alston v. U.S. Dept. of Educ., 297 B.R. 410, 417 (Bankr. E.D. Pa. 2003) (the argument that a debtor might be able to make some payments during the 25 year repayment period “loses sight of Congress’ intent that bankruptcy relief provide the debtor with a fresh start”);Korhonen, 296 B.R. at 497 (“unlike the Income Contingent Repayment Plan, bankruptcy relief is designed to give the honest but unfortunate debtor a fresh start”).

When Congress first determined that educational loans should be presumptively excepted from discharge, it was because it believed that many student borrowers were abusing the `fresh start’ policy by filing for bankruptcy and obtaining discharge of educational debt soon after graduation, before making any significant attempts at repayment. Congress permitted the discharge of educational debt, however, if the bankruptcy petition was filed at least five years after the loans first became due. The enactment of the *18 five year nondischargeability period thus reflected the congressional purpose of shielding the government guaranteed educational loan program from opportunities for abuse. Hiatt v. Indiana State Student Assistance Comm’n, 36 F.3d 21, 24 (7th Cir. 1994) (citations omitted), cert. denied, 513 U.S. 1154 (1995).

The five year nondischargeability period was statutorily extended to seven years, and has now been entirely eliminated. But the “fresh start” policy is still integral to the bankruptcy process, and cannot be ignored. Durrani took out her first student loan in 1984. If she is forced to participate in the ICRP, she will not be free of this student loan debt until 2029. Despite the testimony of an ECMC witness that the purpose of the ICRP is to allow student loan borrowers a fresh start, binding Durrani to her debt until 2029 would give no weight whatsoever to the notion that at some point, honest but unfortunate debtors are entitled to a fresh start.

The Discharge of a Student Loan After the 25 Year ICRP Term is a Taxable Event.

The court must also take into account the considerable tax burden that will be borne by Durrani if she does participate in the ICRP for the full 25 year term. The ICRP provides that any portion of the debt that is not paid will be discharged at the end of 25 years. However, that discharge of indebtedness, unlike a discharge in bankruptcy, results in income that Durrani would have to recognize for taxable purposes. As several cases have noted, the result is that she would still face a nondischargeable debt after the repayment period has run:

That conclusion [that the debtors satisfied the second Brunner prong] is not changed, as Defendant urges, because Debtors’ loans would be discharged after 25 years. In that event the unpaid amount, together with the interest which will have accrued in 25 years, would be discharged by the Defendant and treated as taxable income. In other words, the Debtors would simply exchange one huge nondischargeable debt for educational loans for another in the form of nondischargeable income taxes. See 11 U.S.C. § 523(a)(1). Under these circumstances of clear and undue hardship, this Court deems the better result is to discharge the Debtors’ educational loan debt, which they have no prospect of ever repaying, now and give the Debtors the benefit of a fresh *19 start. Thomsen, 234 B.R. at 514. See also Grawey, 2001 WL 34076376, at *6; Gregoryk, 2001 WL 1891469, at *3. Compare Archibald v. United Student Aid Funds, Inc., 280 B.R. 222, 229-230 (Bankr. S.D. Ind. 2002) (giving little weight to the tax implications of the ICRP where debtor “will likely obtain employment more in line with her educational qualifications, making the income tax treatment of a fully or near fully paid off loan negligible”).

There Are Emotional Aspects to the Denial of Dischargeability That May Be Considered.

The psychological and emotional toll on a debtor that results from adding 25 years to the life of a student loan should not be overlooked. This is especially true where, as here, the debtor first incurred the debt between 14 and 20 years ago. See, e.g., Fahrer, 308 B.R. at 36 (acknowledging that “[i]n a different context, the Court might give more weight to the availability of the ICRP and a debtor’s refusal to apply for participation in that program,” but under the circumstances, the substantial emotional toll on the debtor would only be “compounded and exacerbated if the Debtor remains responsible for $180,000 in student loan debt, a sum which will increase with accruing interest and which ultimately may not be resolved for a quarter of a century”); Herrmann, 2000 WL 33961388, at *4 (discharging student loans where debtor who “will never have the income to make payments on her student loans . . . should not have to have these student loans hanging over her head for another 25 years . . .”). Although Durrani will never be able to pay off this loan, she will be burdened by a huge and growing obligation that remains on her credit record, and arguably, according to Durrani, condemns her to remaining in a neighborhood that is becoming increasingly unsafe, because the loan obligation blocks her ability to rent from another landlord who would perform a credit check.

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If a Debtor Who Is Eligible To Participate in the ICRP Could Never Show Undue Hardship, the Effect is the Impermissible Substitution of an Administrative Formula for a Bankruptcy Judge’s Discretion.

Finally, the decision whether to allow debtors to discharge a student loan is committed to the discretion of the bankruptcy judge, using the three part test set forth originally in Brunner. Courts must not turn to the ICRP as a substitute for the thoughtful and considered exercise of that discretion. To do so would be to abandon all decision-making responsibility and convert a § 523(a)(8) adversary into a rote and meaningless exercise.

If Congress had intended the question of dischargeability of student loans to be delegated to a nonjudicial entity, no matter how fair its formulas and intentions may appear, it could have provided for such. As attractive as it may be to postpone the decision and to rely on the long-term supervision afforded by the ICRP and the apparent fairness of its continuing review of a debtor’s income as compared to the established poverty standard, the Court will discharge its duty as provided in the Code and make a present determination of dischargeability.

Johnson, 299 B.R. at 682. See In re Nys, 2003 WL 22888941, at *1 (Bankr. N.D. Cal. Aug. 11, 2003) (“Testimony in this and other cases has convinced the court that some officials of the Ford Program are compassionless number-crunchers and that determinations as to how much a debtor can afford to pay are much better left to the courts.”), reversed and remanded, 308 B.R. 436 (B.A.P. 9th Cir. 2004) (to reconsider finding of nondischargeability); Herrmann,
2000 WL 33961388, at *3 (“The Department of Education may not usurp the judicial function of determining undue hardships by promulgating regulations governing the repayment of student loans.”).

For all of these reasons, the court finds that based on current income and expenses, Durrani cannot maintain a “minimal” standard of living for herself if she is forced to repay this debt.


The court previously found that Durrani satisfied the second and third Brunner prongs, and has set forth its reasoning more fully in this opinion. Upon reconsideration, the court now finds that Durrani has satisfied the first Brunner prong as well.

Therefore, Durrani has met her burden of showing that excepting the debt to ECMC from discharge would impose an undue hardship upon her, pursuant to 11 U.S.C. § 523(a)(8). The motion for reconsideration is granted, and Durrani’s debt to ECMC is discharged.

The case is United States Bankruptcy Court, N.D. Illinois, Eastern Division. IN RE DURRANI Case No. 97 B 16918, Adversary No. 02 A. 1859. (Bankr. N.D. Ill. Jun. 30, 2004)

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