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Totality of the Circumstances Test Revisited to Determine Dischargeability of Student Loan Debt

October 29, 2019

On remand from the United States Bankruptcy Appellate Panel for the First Circuit (“BAP”), the U.S. Bankruptcy Court for the District of Massachusetts Western Division was once again faced with the issue of whether a debtor’s student loan debts are dischargeable under § 523(a)(8) of the Bankruptcy Code. § 523(a)(8) creates a presumption that student loans are not dischargeable in bankruptcy. Despite this presumption, a debtor may prevail upon a showing of “undue hardship.” In its Opinion, the BAP for the First Circuit noted that the Bankruptcy Code does not define “undue hardship,” nor does the statute provide guidance on what is considered “undue hardship.” The BAP held the appropriate test to determine “undue hardship” is the totality of the circumstances test.
 

Under the totality of the circumstances test, the court must consider “(1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable, necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.” To further define the test, the BAP cited one Massachusetts bankruptcy court’s rephrasing of this inquiry: “Can the debtor now, and in the foreseeable future, maintain a reasonable, minimal standard of living for the debtor and the debtor's dependents and still afford to make payments on the debtor's student loans?”

 

In its earlier judgment, the district court found that repayment of her student loans would not constitute an “undue hardship” within the meaning of § 523(a)(8) based on its reliance on the equity claimed in the debtor’s homestead exemption. However, the BAP determined that the lower court misapplied the totality of the circumstances test in its previous decision by failing to make detailed findings regarding “the debtor's income and expenses, the debtor's health, age, education, number of dependents and other personal or family circumstances, the amount of the monthly payment required, the impact of the general discharge under chapter 7 and the debtor's ability to find a higher-paying job[,] move or cut living expenses.”

 

In providing a “laundry list” of factors to consider, the BAP emphasized that the totality of the circumstances test highlights that each debtor’s case is complex and deserves to be evaluated individually and it its own context. When looking at these factors on remand, the district court noted that the debtor is a single mother, in her 60s, who has suffered from chronic illness, and her income after graduating law school in 2009 has not exceeded $25,000 annually. Further, the district court concluded that the debtor was not currently, or in the foreseeable future able to increase her annual income or find additional employment. Based on these factors and more, the district court found that excepting the debtor’s student loans would impose an undue hardship and ruled that her remaining student loan obligations were discharged.

 

Memorandum of Decision After Remand

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