Bankruptcy Court Finds Student Loan Debt Dischargeable

Monday, June 6, 2016

Student loan debt in the United States continues to mushroom, and according to the Federal Reserve, is approaching the $1 trillion mark.  As bankruptcy practitioners and many in the public well know,, the Bankruptcy Code generally prohibits debtors from discharging student debt.  The Bankruptcy Court for the District of Idaho recently invoked the seldom used exception to this rule when it discharged $83,000 of $93,000 in student loan debt.  In re McDowell, __ B.R. __ (Bankr. D. Id. 2016).
The Court found that the debtor, a 43-year old single mother of two children, was entitled to the undue hardship exception because she was unable to maintain a minimum standard of living, which would continue for a long period of time. The debtor worked 32 hours a week, earning $3,400 per month.  After an extensive analysis, the Court ruled that the $83,000 discharge was appropriate, citing the debtor’s health issues, notwithstanding the fact that the debtor had used credit to purchase a motorcycle and spent thousands on a trip to South America.  The Court explained “while her financial decisions have not been perfect…she would have nonetheless been unable to make any substantial student loans payments while meeting her normal living expenses.”

The increasing prevalence of burdensome student loan debt raises the question of whether the reasoning of In re McDowell will set a trend for other bankruptcy courts across the country.  

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