This is an interesting case out of Massachusetts, wherein U.S. Bankruptcy Judge Joan Feeney found that the debtor's repayment of his student loans would not be an undue hardship, and refused to discharge them, because he would qualify for government repayment programs, including Income Contingent Repayment and Income-Based Repayment, and the amount due for his monthly payments could be -0- until he got back on his feet.

However, the repayment programs mentioned above contemplate a borrower paying back the student loans according to a formula, based on their income and family size. To the extent the loans are not repaid in 25 years, any amount remaining is forgiven at the end of the 25 year repayment period.

But, the amount forgiven can then become taxable income to the borrower, and they can be in old age and find themselves saddled with a big IRS tax bill that they cannot get rid of. The judge (at least) didn't think that was right. Since the debtor could owe income taxes at the end of those repayment programs if any amount of the student loans were forgiven, the judge ruled that she would give a bankruptcy discharge to the debtor for any amount of the student loans that were not repaid during the term of the repayment plan, if the debtor chose to enter into such a repayment plan. Debt discharged through bankruptcy is not considered income from forgiveness of debt. See Internal Revenue Code 26 USC §108(d)(2).

This is an example of how student loan creditors are coming into Bankruptcy Courts and arguing that since there are these other options available, courts should not do their job and just decide the case based on the statute. There is nothing in 11 USC §523(a)(8) about ICR or IBR. This debtor, at least to me, was obviously in need of relief, and should have had the student loans discharged. What do you think? Comments or questions welcomed!

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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