Roughly $152 billion of student loans are ninety or more days delinquent. Bankruptcy would seem to be an appropriate way to address this problem, but student-loan debtors labor under a unique disadvantage. Such debtors must show \u201cundue hardship\u201d to get a bankruptcy discharge of their student loans. Because the bankruptcy system provides permanent debt relief through granting a discharge, this \u201cundue hardship\u201d requirement is an ob-stacle for student-loan debtors. At the same time, the federal government offers an option for most student loans that may make repayment easier: income-driven repayment (\u201cIDR\u201d) plans, under which the debtor makes payments of ten to twenty percent of discretionary income for twenty to twenty-five years, after which any outstanding balance is cancelled.<\/p>\n
This Article addresses how the availability of IDR should affect the analysis of undue hardship in student-loan bankruptcy. It reviews legisla-tive history and Supreme Court precedent pertinent to bankruptcy\u2019s fresh-start policy, the student-loan exception to dischargeability, and the IDR programs, and draws three principal conclusions. First, the policies supporting a fresh start in bankruptcy apply to student loans, even if par-ticipating in IDR would result in an affordable payment. Second, when student loans have been in repayment for more than five years, the only policy supporting nondischargeability is that of creditor recovery. Third, IDR is intended to make life easier for student-loan debtors, not to increase their exposure to hardship through denial of discharge.<\/p>\n
This Article applies these findings to several factual situations com-mon in student-loan bankruptcy. It argues that IDR\u2019s availability should not count against discharge if the debtor could not maintain a minimal standard of living while making IDR payments, or if IDR would extend the repayment period and the debtor could not maintain an above-mini-mal standard of living during the repayment period. In bankruptcies com-menced after five years of repayment, the student-loan debtor generally should receive discharge if the creditor cannot show a substantial likeli-hood of significant repayment, so the availability of a zero-payment IDR plan should not weigh against discharge. Other possible consequences of IDR include negative amortization\u2014loan balances that increase because\u00a0payments are not enough to cover accumulating interest on the debt\u2014 and tax liability upon discharge because the forgiven debt is treated as income. These consequences should weigh in favor of discharge, poten-tially by increasing the level of expected repayment the creditor must demonstrate. The debtor\u2019s failure to learn about IDR usually should not count against the debtor, unless IDR actually would provide a viable al-ternative to discharge.<\/p>\n