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Court: Disabled, impoverished Md. woman must repay student loans

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, according to the judge—consisted of Social Security disability benefits and public assistance. She has been unemployed since 2008.

Stitt 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 shake the debt, the woman appealed to the U.S. District Court in Maryland without a lawyer, where 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, U.S. District Judge Peter J. Messitte said in his opinion. Unlike credit card debt, student loans can almost never be discharged in bankruptcy. 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 exactly how bad someone’s circumstances need to be to qualify for relief.

Usually, as in Stitt’s case, 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 she must prove that her current destitute circumstances will last for quite a long time. Last, the debtor has to show she has made “good-faith efforts” to repay the loan in the past.

Stitt met the first criterion, because a judge said that even if she paid only $3.50 per day in interest on the loan, she would still not have a minimal standard of living. Yet the judge said she failed 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.

Messitte did his own research and found that she 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, Messitte encouraged her to participate in the consolidation program even though it wouldn’t afford an immediate “fresh start,” as bankruptcy would.