Monica Stitt, a 45-year-old woman, is unemployed, disabled, and living far below the poverty line. Still, a federal district judge decided last week that she could not cancel more than $37,000 in student debt in bankruptcy, because she hadn’t made a good-faith attempt at repaying the loans.
Her entire income- about $10,000 per year – consisted of Social Security disability benefits and public assistance. She has been unemployed since 2008.
She had borrowed $13,250, which had increased with interest to $37,400 by the time she filed for bankruptcy. After the bankruptcy judge ruled she couldn’t discharge the debt, Stitt appealed to the U.S. District Court in Maryland without a lawyer, and a district judge upheld the bankruptcy court’s ruling on June 9.
The debtor didn’t meet the “undue hardship” test required by the bankruptcy code. Unlike credit card debt, student loans can almost never be discharged in bankruptcy. There are alternatives to bankruptcy, such as debt consolidation, but this can be difficult to manage if cashflow is not adequate enough. The only way people who have filed for bankruptcy can get rid of the debt is by proving that repaying them would impose “undue hardship” on their lives.
That standard is not defined in the law, so it has been left to the courts to decide how bad someone’s circumstances need to be to qualify for relief. U.S. courts use a three-pronged test to decide whether paying back a student loan would be too difficult. First, a borrower must prove that she can’t maintain a “minimal standard of living” while also repaying the debt. Then the debtor must prove that the current destitute circumstances will last for quite a long time. Lastly, the debtor has to show s/he has made “good-faith efforts” to repay the loan in the past.
Stitt met the first two criteria, but she flunked the third part of the test-showing a good-faith effort to repay the loan-in part because she held a government-sponsored job for a few months in 2008, when she earned $11,000. The bankruptcy judge criticized her for not using some of the income to pay her student loans. Stitt said she used the income to pay credit card debt and other expenses.
The judge stated that Stitt was eligible for two federal loan-consolidation programs in which no payments would be required since her income was so low. After 25 years in the program, the debt would be forgiven even if she had made no payments, as long as her income hadn’t risen. In upholding denial of discharge of the loans in bankruptcy, the judge encouraged her to participate in the consolidation program. There are many options from Debt Consolidation USA which help people with loans that are piling up and are likely to never be paid. The consolidation process can help someone get their finances back on track and regain control of their money.
If you are looking to file for bankruptcy, you could go ahead and file bankruptcy without a lawyer. However, seeking the guidance of a qualified bankruptcy attorney may be very helpful because of the long-term financial consequences of a bankruptcy filing. If you wish to do so in North Carolina, you may want to speak with Sasser Law Firm.
If you’re concerned about how you’re going to fund your time at college, you might want to look at student loans by Sofi to see how they can help you out.