The question centrally entertained by several different courts and addressed most recently just last week by a federal appeals court concerns whether an individual unable to repay student debt and filing for bankruptcy must, as a prerequisite to that discharge, enroll in a federal income-based repayment plan.
In the case of a financially struggling paralegal who dutifully repaid student loans for 11 years and thereafter demonstrated undue hardship to a bankruptcy court, the answer to that query, ruled the bankruptcy judge, was no: The debt in that case was deemed dischargeable under bankruptcy law without such an imposed requirement.
That decision was subsequently reversed by a federal district court judge, who ruled that the debtor – who owed a remaining $25,000 – had a good-faith duty to enroll in the William D. Ford Income-Based Repayment Plan, a federal program pursuant to which borrowers pay up to 15 percent of their discretionary income for up to 25 years. Repayment under the program is based on earnings, not the amount owed. If debt remains after 25 years, it is forgiven. The district court ruled that good faith requires a committed pledge to repay in the future if possible.
That view was struck down last week by a 7th U.S. Circuit Court of Appeals decision reinstating the bankruptcy court’s ruling. The court ruled that such a requirement undercuts the purpose of bankruptcy law. If allowed to stand, the court reasoned, “no educational loan could ever be discharged, because it is always possible to pay in the future should prospects improve.”
The appellate court stated that the bankruptcy judge had full discretion to assess whether a continued duty on the paralegal posed an undue hardship and whether a requirement to enroll in a repayment program was mandated.
Source: ABA Journal, “7th Circuit OKs $25K student-loan discharge for ‘destitute’ paralegal,” Martha Neil, April 10, 2013