The court uses a three-part test to determine the "undue hardship" required to discharge student loans in bankruptcy pursuant to 11 U.S.C.S. § 523(a)(8)(B): first, the debtor must establish that she cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans. Second, the debtor must show 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. The third prong requires that the debtor has made good faith efforts to repay the loans.
Debtor-Appellees Ernest and Julie Pena sought a bankruptcy court discharge of government insured student loans which were guaranteed by appellant United Student Aid Funds, Inc. (USA Funds). The Penas contended the loans were dischargeable in bankruptcy because payment of them would impose an undue hardship within the meaning of 11 U.S.C. § 523(a)(8)(B). The bankruptcy court agreed and discharged the loans. The BAP affirmed. USA Funds now appeals.
Did payment of the student loans, in this case, impose an undue hardship within the meaning of 11 U.S.C. § 523(a)(8)(B) making them dischargeable?
Adopting a three-part test for determining "undue hardship," the court held that the bankruptcy court did not clearly err in finding that (1) appellees could not, based on their net monthly income, maintain a minimal standard of living and repay their student loans; (2) their unfortunate financial situation, exacerbated by appellee's mental disability and the negligible value of her husband's education, was likely to continue for a substantial portion of the repayment period; and (3) they had made a good-faith attempt to pay the loans. Appellees established "undue hardship" within the meaning of 11 U.S.C.S. § 523(a)(8)(B) and the adopted test; they were entitled to a bankruptcy discharge of their student loans.