Student Loans: “When You’re in a Hole, Stop Digging,” Appeals Court Agrees

The Eighth Circuit Bankruptcy Appellate Panel upheld a lower court’s ruling discharging $204,525.00 in student loans, despite the lender’s argument that the debtor could have continued her education and sought higher-paying employment as a chiropractor.

Shaffer v. U.S Department of Education, No. 12-601o (8th Cir.BAP Oct. 30, 2012), involved an unmarrieddebtor in her mid thirties who filed chapter 7. She started her undergraduate education at the University of Northern Iowa in 1994, and later enrolled at Iowa University, obtaining a degree in psychology in 2002. Afterward, sheattended Kirkwood Community Collegeoff and on, in order to qualify under her parents’ health insurance.

In 2007, the debtor enrolled at Palmer College of Chiropractic Medicine, but she left after thirteen months after concluding that her student loan debt was insurmountable.

The debtor also suffered from depression, eating disorders, self harm in the form of cutting, and anxiety. In 2008 she commenced employment at a women’s health clinic, but left one year later. She next worked as an accounts receivable specialist at a different employer, but left after depression caused her to take two leaves of absence, believing she was about to be fired.

The debtor then worked at avariety of temporary jobs, cashed in her pension, relied on the support of her family, and collected disability. She filed chapter 7 in 2010, and then began employment in the radiation department at the University of Iowa, making about $1,600.00 per month net pay.

After receiving a discharge of debts in her chapter 7 case, the debtor asked the bankruptcy court for a ruling that her $204,525.00 student loan debt was an undue hardship under 11 U.S.C. section 523(a)(8). The bankruptcy court agreed, and the lender appealed.

The federal appeals court upheld the bankruptcy court’s finding that after all the debtor’s monthly living expenses were paid, she had less than $100.00 left over to pay toward her student loans. This was “minimal” and not enough to make progress toward paying off the student loans.

The appeals court also dismissed the lender’s argument that the debtor’s income limitations were self-imposed, because she could have stayed in chiropractic school.Eventually, the argument ran, she could have attained a much higher salary than her current $1,600 per month net pay. However, the appeals court accepted the debtor’s testimony that she had good reasons to leave chiropractic school based upon wanting to avoid additional student loan debt. The appeals court quoted approvingly from Will Rogers: “When you find yourself in a hole, stop digging,” and also Kenny Rogers, “You got to … know when to fold ’em.” The student loans’ discharge was therefore upheld.

Photo courtesy of DonkeyHotey, Flickr.