Judge Rules Woman Living On $10,000 Income Isn’t Facing ‘Undue Hardship,’ Can’t Cancel Student Loans

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A federal judge ruled that an unemployed woman whose income is only about $10,000 a year doesn’t qualify for cancellation of $37,000 in student loan debt because she doesn’t meet the test of “undue hardship” and didn’t make a “good faith attempt” to repay her loans. The woman, Monica Stitt, made nine voluntary payments, which were $10 each, in 1997, but did not make any payments since then, according to court documents.

Stitt is 45 years old with no dependents and receives Social Security disability benefits and public assistance. She hasn’t held a job since 2008. She borrowed $13,250, four student loans disbursed between 1989 and 1990, when she attended Howard University, which all defaulted in either 1991 or 1992.

But after interest accumulated over the years, it amounted to $37,400 by the time she filed for bankruptcy. Because they are issued and guaranteed largely by the federal government, student loans are very rarely discharged in bankruptcy, meaning that bankruptcy court treats student loan debt like tax liens or child support. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which closed some loopholes to students trying to discharge private student loan debt, made it even more difficult for students to pursue “undue hardship.”

To discharge student debt, you have to prove undue hardship for Chapter 7 or Chapter 13 bankruptcy for student loans. Because “undue hardship” is not defined by bankruptcy law, judges must make their own judgments through case law. Because the test is so fact-specific and requires a lot of meticulous documentation, most people who want to discharge student debt will have to pay for a lawyer.

However, those most in need of discharging their debt can’t afford a lawyer, making their chances of successfully arguing a case in an adversarial setting much more difficult. Lawyers arguing for the lenders can also be very aggressive. In a 2007 and 2001 case, lawyers for student loan lenders went so far as to ask women whether their children were planned in an effort to accuse them of bringing hardship on themselves.

A substantial portion of students default on their student loans, although the rate is falling. The annual cohort default rate for federal student loans was 13.7 percent for students who entered the repayment period in 2011, a decrease from 14.7 percent for students who began repayment in 2010, according to the U.S. Department of Education.

In this case, U.S. District Judge Peter J. Messite applied the usual three-prong test for determining undue hardship. That means Stitt had to show that she couldn’t maintain a minimal standard of living for herself and her dependents if she were forced to pay off loans, that other life circumstances suggest that the financial situation is likely to continue throughout a “significant portion of the repayment period” and that she made a “good faith effort” to repay the loans.

But the judge said that although Stitt met the first two prongs of the test, she failed the third, because she failed to consider loan consolidation and repayment plan options. When Stitt’s income exceeded her expenses, she didn’t make voluntary payments, the judge noted in his decision.