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Court Discharges $200K in Student Debt Based on Mental Illness

By Robyn Hagan Cain on October 30, 2012 | Last updated on March 21, 2019

Higher education is expensive, and the cost keeps rising. A growing number of people have started warning of an education bubble to rival the mortgage bubble. But there's a difference between and home loans and student loans: Generally, student loans aren't dischargeable in bankruptcy.

The exception to this rule is undue hardship, which takes on a Potter Stewart quality in bankruptcy proceedings: It's not clearly defined, but a judge knows it when she sees it.

This week, the Eighth Circuit Court of Appeals offers an undue hardship example.

Susan, the debtor in the appeal, suffers "from a variety of mental health issues, including eating disorders, depression, self-harm (cutting), and anxiety." These mental health issues have adversely affected both her academic endeavors and her ability to maintain employment.

To fund her education at various colleges and universities, Susan took out student loans. She owed a total of more than $200,000 to three lenders: the U.S. Department of Education, Educational Credit Management Corporation, and Iowa Student Loan.

In 2010, Susan filed a Chapter 7 bankruptcy petition and a complaint to determine the dischargeability of her educational loan debts. The matter was tried, and the bankruptcy court discharged her student debts.

If "excepting such debt from discharge ... would impose an undue hardship on the debtor and the debtor's dependents," a discharge under 11 U.S.C. § 727 discharges the debtor from a debt for an educational loan funded in whole or in part by a governmental unit or nonprofit institution. The debtor must establish undue hardship by a preponderance of the evidence.

In determining whether the debtor has met this burden, the bankruptcy court must consider the totality of the debtor's circumstances, taking into account:

  1. The debtor's past, present, and reasonably reliable future financial resources.
  2. A calculation of the reasonable living expenses of the debtor and her dependents.
  3. Any other relevant facts and circumstances surrounding the particular bankruptcy case.

Here, Iowa Student Loan challenged the discharge, arguing that Susan could have avoided "self-imposed" financial downfall if she hadn't quit chiropractic school. It also asserted that her past monthly clothing and dining expenditures demonstrated that she could afford part of her student loan payments.

The Eighth Circuit disagreed.

The appellate court noted that Iowa Student Loan's argument pre-supposed that Susan would have completed chiropractic school, found a job, and made enough money to cover her loans. (Any recent law grad can tell you that's a dangerous assumption.) The Eighth Circuit also reasoned that a bankruptcy court shouldn't determine a debtor's future ability to pay based on her past over-spending habits.

Based on cases we've read, mental illness seems to be the most common basis for undue hardship discharge. What are some of the other reasons you've seen to support student loan discharge? Share them with us on Google Plus or on Facebook.

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