7th Circuit: Long-term unemployment justified discharge of student loans

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A debtor who was unable to find a job after a decade-long search met the Bankruptcy Code’s standard for discharge of her student loan debt, the 7th U.S. Circuit Court of Appeals has ruled in reversing judgment.

The debtor is 53 years old and has not held a job since 1986, when she left the workforce to raise a family. She lives with her elderly mother in a rural community where few jobs are available. A lack of Internet access and a working automobile hampers the debtor’s search for work as a trained paralegal.

A bankruptcy judge granted the debtor a discharge of $25,000 in student loan debt.

A district court reversed, persuaded by the Educational Credit Management Corporation’s argument that the debtor could not show “undue hardship” necessary to obtain a discharge of student loans under §523(a)(8) of the Bankruptcy Code. Specifically, the agency contended that the debtor had not been sufficiently diligent in her job search because she had filed “only” 200 applications for employment in the past decade.

But the 7th Circuit was satisfied that the debtor had acted in good faith.

“The district judge did not doubt that [the debtor] has paid as much as she could during the 11 years since receiving the educational loans. Instead the judge concluded that good faith entails commitment to future efforts to repay. Yet, if this is so, no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve. Section 523(a)(8) does not forbid discharge, however; an unpaid educational loan is not treated the same as a debt incurred through crime or fraud. The statutory language is that a discharge is possible when payment would cause an ‘undue hardship,’” the 7th Circuit said.

U.S. Court of Appeals, 7th Circuit. Krieger v. Educational Credit Management Corp., No. 12-3592. April 10, 2013.