"Undue hardship" under the Bankruptcy Code, 11 U.S.C.S. § 523(a)(8)(B), requires a three-part showing (1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for himself and his dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
The debtor incurred student loans guaranteed by a state agency. After the debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C.S. §§ 101-1330, he filed a complaint against the state agency requesting discharge of the unpaid balance on his student loans pursuant to the undue hardship exception of 11 U.S.C.S. § 523(a)(8)(B). The bankruptcy court denied discharge of the student loans, but it ordered a two-year deferment. The debtor appealed, and the district court reversed and discharged the student loans. The state agency appealed.
Should the student loans be discharged?
The court of appeals reversed the discharge because the debtor failed to demonstrate undue hardship; the debtor's financial problems were not likely to continue for an extended period of time. The court held that while the bankruptcy court presented a bleak forecast for the near future, its factual findings lead it to conclude that the debtor's dire straits are only temporary, and thus he has failed to demonstrate "undue hardship" as required for the discharge of his student loans under § 523(a)(8)(B).