Question

You work as a financial consultant for a major national company. One of your clients, Kay, comes in to talk to you about a new idea. She is interested in quitting her management job at a large corporation where she has long hours and a lot of stress. She would like to take a position with a much smaller not-for-profit company, focusing on an issue she has been passionate about for years. Unfortunately, this not-for-profit cannot pay her even half of what she makes now. She has figured out that if she can get rid of her $40,000 in student loans (which she can currently pay monthly but could not if she took the nonprofit job), she could afford to take the job and maintain a decent lifestyle. She has come to you to discuss declaring bankruptcy to get rid of her student loans so she can change jobs. Analyze her ability to do this.

Answer 1

Under federal bankruptcy laws of the United States, anyone can file for bankruptcy so as to seek relief from creditors. However, this comes at the expense of hurting one's credit scores for a long time (sometimes upto a 10 year period) along with incurring significant legal,, procedural and court fees.

That being said, bankruptcies are majorly difficult processes simply because creditors would not want any debtor to take the easy way off in case the debtor does not want to payback. This is even more true in case of student loans where the debtor (Kay in this case) has to prove without reasonable doubt that he/she would face "undue hardship" if he/she were to proceed with loan repayments. The "undue hardship" proving part is open to a variety of interpretations, cross examinations and legal scrutiny by the court of law. Most courts utilize the "Brunner Test" to determine a debtor's eligibility for student loan discharge. The key provisions of the test are laid down by the United States Department of Education's, Federal Student Aid Office as given below:

(a) The debtor, based on his/her current income and expenses, cannot maintain a decent "minimal" standard of living for himself/herself and his/her dependents if he/she were to continue with the loan repayments.

(b) Additional circumstances prove beyond doubt the fact that this condition will pevail for a majority of the tenure of the loan repayment.

(c) The debtor has tried repaying his/her student loan in good faith up until this point.

In this particular scenario, Kay would be better off in trying to get the loan waived, if she files for bankruptcy post changing her job. This is so because her current job pays enough to repay her student loan and hence do not meet two of the three Brunner Test criteria. Switching over to the non profit job would threaten her current standard of living (and probably that of her dependents) and conforms to the basic spirit of the "Brunner Test". It would off course be upto her legal counsel to prove this threat (post job change) to her living standard in front of the court and gain a student loan waiver.