A fundamental goal of bankruptcy is to give the debtor a “fresh start” by discharging their debts. For student loan debtors in bankruptcy, the opportunity of a “fresh start” is limited. Under title 11 of the United States Code (the “Bankruptcy Code”), student loans are not dischargeable unless excepting such debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents. Without guidance from the statutory text, the definition of undue hardship is left up to judicial interpretation, giving rise to much litigation.
An issue that frequently arises when undue hardship is litigated is the availability of an Income-Driven Repayment (“IDR”) plan. These plans allow a debtor to pay a percentage of their income for twenty-five years and provide for cancellation of any outstanding balance at the end of the repayment period. By making student loan repayment more affordable, IDR plans can lessen the burden of student loan debt. In student loan bankruptcies, creditors frequently argue that, due to the availability of an IDR plan, the non-discharge of a student loan can never constitute undue hardship. There is no statute or regulation that explicitly requires IDR plans to be considered in student loan bankruptcy cases, however, the majority of appellate courts have unanimously treated the availability of IDR plans as relevant in assessing undue hardship.
This memorandum addresses the relationship between the discharge of student loans in bankruptcy upon a finding of undue hardship and the availability of an IDR plan. Part I outlines two doctrinal tests used by courts to determine whether the repayment of student loans imposes an undue hardship on a debtor. Part II then examines how courts have adapted the tests when a debtor is eligible for an IDR plan, and the role eligibility plays in determining undue hardship and the dischargeability of student loans.