One of the problems with litigating against the federal government is that when you win, they very often always appeal the decision and thereby force your client to undertake the expense of an appellate proceeding. So there’s really nothing better than when an appellate court smacks the government back into place by affirming a bankruptcy court’s ruling discharging student loans.
And that’s exactly what happened in Fern v. U.S. Department of Education, 563 B.R. 1 (8th Cir. B.A.P. 2017). In that case, the United States Bankruptcy Court for the Northern District of Iowa discharged more than $25,000 in federal student debt as an “undue hardship.” There the court found that the debtor was a single mother, aged 35, with three small children. She earned approximately $1,500 a month, and also received food stamps. The court also noted that Ms. Fern had never made a payment on the loans. Ever. Despite these factors, the court was persuaded that under the “totality of the circumstances test,” the debtor had carried her burden and was entitled to a full discharge of all student debt.
The government balked at this finding, noting that the debtor was not physically or mentally disabled, and more importantly, qualified for an income driven repayment plan wherein she would pay $0 a month. A zero dollar monthly payment, the government argued, could not possibly impose an “undue hardship.”
Not so fast, held the United States Bankruptcy Appellate Panel of the Eighth Circuit:
“We do not interpret Jesperson to stand for the proposition that a monthly payment obligation in the amount of zero automatically constitutes an ability to pay.”
The Appellate Panel went on to affirm all of the bankruptcy court’s findings, including the reasonableness of the debtor’s monthly expenses, and the importance of those tax consequences that would result from simply placing the debtor in an income driven repayment plan. The Panel was also persuaded by debtor’s arguments about the negative effect on her credit score the student loans were having.
Let it not be said that you can’t fight city hall—even at the appellate level.