The 8th Circuit Bankruptcy Appellate Panel issued a new opinion approving the discharge of 11 of the 15 private student loans owed by Chelsea Conway. (See In re Conway, 8th BAP 2015).

The court discharged $76,535 of the $95,499 owed, leaving the debtor to repay 4 loans totaling $18,964.

What is most interesting about this case is the method the court instructed the bankruptcy court to utilize in determining what private student loans to discharge.

The B.A.P. instructed this Court to conduct “a loan-by-loan undue hardship analysis” based on Debtor’s “present disposable income” which this Court must determine through analyzing Debtor’s ability to “service a loan or loans of NCT over the course of an entire year.”

Read a copy of the trial court’s ruling here.

All student loan discharge matters go through a standard analysis to determine if the loans constitute an “undue hardship.”  The courts look at the debtor’s past income, their age, future income potential, special family needs, health issues, mental health factors, etc.  That is the standard analysis.

What makes the Conway case different is the focus on determining a debtor’s “present disposable income” and then performing a “loan-by-loan undue hardship analysis.”

Distilling the court’s opinion, we derive a three-step process:

  1. Is the debtor’s income likely to increase?  In short, is the debtor’s income stuck in the mud? Is the debtor working to their best ability with an income that is not likely to increase, or is the debtor just making a half-hearted effort to earn income?  If it appears that the debtor has reached his or her maximum earning potential the court will consider the hardship discharge.
  2.  Present Disposable Income.  The court must determine the debtor’s current average income.  There is no specific time frame utilized, but the courts should generally look heavily at the last few years of income and the past 12 months in particular to determine a debtor’s average monthly income.  From that figure the court will deduct all necessary and reasonable monthly expenses to arrive at an average monthly disposable income.  Every case is unique, and what is reasonable for one debtor may vary from what is necessary for another.
  3. Loan-by-Loan Hardship Analysis.  Once the court has determined the monthly disposable income available the court should determine how many of the private student loan payments can be made with that payment.  In the Conway decision the court determined that $170.30 was available to pay private student loans.  Four of the 15 loans required a payment totaling $167.11.  Those 4 loans were preserved and the remaining 11 loans were discharged.

The key element in this analysis is to effectively argue that a debtor’s income has basically flatlined.  The career has not worked out as planned.  The degree earned is worthless or limited and despite loads of college learning the debtor is basically stuck in an hourly job with little room for advancement other than cost-of-living increases.

There appears to be a new trend on keeping the income analysis realistic.  In the past bankruptcy courts have dwelled on the possibility that a debtor’s income may increase in the future and that it was too soon to determine if efforts to repay a student loan were futile.  However, recent opinions across the nation seem to suggest that courts are becoming more sympathetic to stagnant wages and have opened their eyes to the reality of limited career advancement.

What remains consistent is the court’s preference for debtors who make a good faith effort to resolve the student loan problem before filing for bankruptcy.  Debtors who truly work at obtaining careers in their field of study while maintaining steady employment tend to receive better treatment than debtors who work part-time or debtors who make no real effort to pay the debt or to seek out income-based payment options.

For more information on discharging private student loans in Nebraska, contact Sam Turco Law Offices.

Image courtesy of Flickr and Susan Ruggles.