Students Must Show Persistent Financial Difficulties to Discharge Student Loans

Joe Pizzingrillo

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

In general, student loan debt is not dischargeable in a case under title 11 of the United States Code (the “Bankruptcy Code”) unless there is a showing of undue hardship.  A court will typically consider a debtor’s potential for future employment in determining whether student loan debt may be discharged. In In re Nitka, the United States Court of Appeals for the Tenth Circuit refused to discharge a former law student’s loan debt because the student had not shown that his financial difficulties were likely to persist for a significant portion of his repayment period.[i] Throughout his loan repayment period from 2015 to 2019, Gordon Nitka worked as a contract employee at a law firm, fitness coach, insurance salesman, and roofing salesman.[ii] Despite earning significant amounts of money, and while participating in an income-driven repayment program, Nitka was making minimal payments towards his loan.[iii] By May 2019, Nitka was unemployed.[iv] While unemployed, he focused his time on building phone apps for restaurants and converting his bus into a vacation rental to park near ski resorts.[v] In July 2018, he filed a petition under Chapter 7 of the Bankruptcy Code and a complaint against the Department of Education for an order discharging his student loan debt.[vi] The lower bankruptcy court granted summary judgment to the Department of Education, the Bankruptcy Appellate Panel ("BAP") affirmed, and Nitka appealed pro se from the BAP decision.[vii]

According to the Tenth Circuit, a debtor establishes undue hardship under Bankruptcy Code section 523(a)(8) when: (1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself/dependents if forced to repay the loans; (2) additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor has made good faith efforts to repay the loans.[viii] Here, the Tenth Circuit held Nitka made a sufficient showing on the first and third elements.[ix] However, as to the second element, the court reasoned that Nitka showed strong potential for future employment should he choose to return to work.[x] The court’s determination was based upon, among other things, his young age, high-level of education, and previous history of holding steady employment.[xi] Also, Nitka’s work on the phone apps showed his technological proficiency which could be useful in obtaining employment.[xii] Moreover, Nitka was working on a vacation rental bus which he planned to rent for $100-$400 per night.[xiii] Consequently, the court held Nitka failed to satisfy the second element.[xiv]

In making these “undue hardship” determinations, the Tenth Circuit based its estimation of a debtor’s repayment prospects on specific, articulable facts and not on unfounded optimism.[xv] Furthermore, the court found that the proper inquiry into future circumstances is limited to the foreseeable future, at most over the term of the loan repayment period.[xvi] Here, Nitka failed to show that his financial situation was unlikely to improve and failed to prove that his financial difficulty would persist for a significant portion of the repayment period given his strong future employment prospects.[xvii]   




[i] Nitka v. Dep’t of Educ. (In re Nitka), 2021 U.S. App. LEXIS 12105, at *13 (10th Cir. 2021).

[ii] Id. at *2

[iii] Id. at *3. Nitka earned $61,901 in 2015 and made no payments; $83,000 in 2016 and only paid $130.92; $31,000 in 2017 and paid $109; and $8,000 in 2018 and made no payments towards his loan. See id.

[iv] Id.

[v] Id.

[vi] Id. at *4.

[vii] Id. at *1.

[viii] Id. at *10–11.

[ix] Id. at *11.

[x] Id. at *13.

[xi] Id. at *12.

[xii] Id. at *12­–13.

[xiii] Id. at *13.

[xiv] Id. at *14. Nitka was unable to satisfy the second element, thus the Tenth Circuit granted summary judgment for the Department of Education. See id.

[xv] Id. at *11.

[xvi] Id. at *12.

[xvii] Id. at *13.