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Bankruptcy Law

7th Circuit OKs $25K student-loan discharge for 'destitute' paralegal

A “destitute” paralegal who has made reasonable efforts to repay her student loan debt is entitled to a bankruptcy discharge of the remaining $25,000 or so despite the fact that she never enrolled in a federal income-contingent repayment plan, a federal appeals court has ruled.

Reinstating a bankruptcy court’s determination that Susan M. Krieger is entitled to the discharge and reversing a federal district court’s decision to the contrary, the Chicago-based 7th U.S. Circuit Court of Appeals said the bankruptcy court had discretion to decide whether requiring Krieger to repay the student loan debt would be an undue hardship.

In a Wednesday opinion (PDF) authored by Judge Frank Easterbrook, the 7th Circuit also said that requiring Krieger to enroll in the income-contingent repayment plan as a show of good faith, was contrary to the purpose of bankruptcy law.

“The district judge did not doubt that Krieger has paid as much as she could during the 11 years since receiving the educational loans,” the opinion states. “Instead the judge concluded that good faith entails commitment to future efforts to repay. Yet, if this is so, no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve.”

In a concurring opinion, Judge Daniel Manion, said he agreed with the court that the bankruptcy judge had discretion to decide the case. However, Manion said he sympathized with the district judge’s opinion that Krieger, at age 53, in good health and well-educated, could surely find work of some kind, despite being located in a rural area, where she lives with her elderly mother, and lacking resources to look for work elsewhere.

Like other well-educated individuals who are having a hard time finding good jobs, or work of any kind, in a tough economy, Krieger should be required to enroll in the William D. Ford Income-Based Repayment Plan, Manion wrote. Absent discretionary income, she would not be required to make any payments. And after 25 years of complying with the program, any remaining balance would be forgiven.

An earlier Bloomberg Law article discusses what happened in the case previously.

Hat tip: Indiana Law Blog.