For many years, I volunteered as an intake attorney for the Neighborhood Christian Legal Clinic in Indianapolis. The NCLC is an amazing organization devoted to the idea that everyone should have access to justice regardless of their income ( As a bankruptcy attorney, I often met with people to discuss Chapter 7. It was always disheartening for me to tell these people that the possibility of discharging their student loans was very slim given the Bankruptcy Code’s “undue hardship” test and the various bankruptcy court opinions analyzing the issue.

The question of what to do about the mounting student loan debt problem in America, however, has led to a few rather creative and incredibly thoughtful opinions from some trailblazing bankruptcy judges in the last few years. Recently, Judge Thad Collins of the Northern District of Iowa has taken a lead role as to this important issue.

Emotional stress from long-term indebtedness can be an “undue hardship”

In Fern v. FedLoan Servicing[1], Judge Collins held that a debtor’s “emotional burden” is a proper consideration under the “undue hardship” analysis and discharged almost $27,000 of Ms. Sarah Fern’s student loan debt.

Ms. Fern, a 35-year old mother of three, had never made more than $25,000 a year despite her efforts to improve her economic situation via earning two post-secondary degrees. Ms. Fern was raising three children on take-home pay of $1,500 that was supplemented with food stamps and public housing assistance.

Ms. Fern had not made a single payment on her student loans; however, she had never been in default because her loans had always been in deferment or forbearance due to her economic circumstances. The Department of Education opposed Ms. Fern’s attempt to discharge her student loans, and noted that Ms. Fern’s income was so low that her monthly payments would be zero under an income-based repayment plan (“IBRP”).

Judge Collins rejected the DOE’s arguments and discharged Ms. Fern’s student loans in their entirety. Judge Collins noted, under an IBRP Ms. Fern’s monthly payment would be zero, but her debt would continue to grow as interest accrued on the unpaid balance. Although the government would forgive any unpaid portion of Ms. Fern’s loans at the end of the repayment period (20 or 25 years in the future), the cancelled loan debt might be taxable as income to her.

Additionally, applying the Eight Circuit’s “totality of the circumnutates test,” Judge Collins recognized emotional stress from long-term indebtedness as a proper consideration under the “undue hardship” analysis. Judge Collins considered the emotional distress that can come from long-term indebtedness and noted Ms. Fern’s testimony that her student loans had already caused her emotional stress. Judge Collins concluded that Ms. Fern would continue to suffer from emotional stress if she were forced into a long-term IBRP. In Judge Collins’ opinion, the emotional burden of long-term indebtedness was a hardship that weighed in favor of discharging Ms. Fern’s student loans, even though this burden could not be quantified. “The Court will not ignore a hardship,” Collins wrote, “simply because it is not reflected on a balance sheet.”

All or nothing in the Eighth Circuit

In the case of In re Martin[1], Judge Collins discharged $230,000 of student loan debt of Ms. Martin noting that under the law of the Eight Circuit partial discharge of student loan debt is not allowed and that it is an all or nothing approach.

Ms. Martin (50 years old) and her husband (66 years old) were supporting their two college-aged children on Mr. Martin’s income of around $39,000. Although, Ms. Martin has a bachelor’s degree, a J.D., and a Master’s degree in public administration she had been unemployed for 10 years at the time of the filing of the bankruptcy petition. Prior to this extended period of unemployment, for three years after her admission to the bar, Ms. Martin held a job as a lawyer with a nonprofit organization until budget cuts ended her employment; she was unemployed for the next five years, followed by eight years of employment in a non-legal job.

The original principal balance of Ms. Martin’s student loans was $48,000 but this had grown to $230,000 with interest at 9%. Over the years, she had paid more than $30,000 toward the loans, with $26,000 of that going toward interest and only $4,000 to principal.

While the lender objected to the total discharge of Ms. Martin’s student loan debt, the lender conceded that she was entitled to discharge all but $90,000 of the loans. As with Ms. Fern, the lender argued that Ms. Martin was not entitled to discharge the loans because she would qualify for an IBRP, and that in 20 or 25 years, whatever was left on the loans would be forgiven. The lender conceded that the forgiveness could be taxable income.

 Judge Collins found, however, that it was an all-or-nothing proposition in the Eighth Circuit noting that the Eighth Circuit BAP prohibits the practice of partial discharge of student loans under Section 528(a)(8). Judge Collins concluded that Ms. Martin was entitled to discharge all her student loans (interest and principal), in large part because her inability to land a job was “not for a lack of trying.” 

Judge Collins was also unmoved by the IBRP argument, noting that it “does not ameliorate the undue hardship.” Judge Collins, applying the “totality of the circumstances” test, considered Mr. Martin’s age, noting that at 66 he may be unable to work much longer, at which time Ms. Martin would become the family’s only wage-earner and could not afford to divert income to paying student loans. In sum, Judge Collins said that the debtor was entitled to discharge the student loans under Section 523(a)(8) because she had shown undue hardship, made good faith efforts to repay, made payments when she was able, applied for deferments when she was not, and incurred reasonable living expenses.

Certainly, Judge Collins’ court is one to keep an eye on as the issues of mounting student-loan debt and related default continue to play out on the bankruptcy stage.

If you have questions about debt, call the banking and litigation attorneys in our Omaha, Sioux City or Sioux Falls offices.


[1] In re Martin, 16-9052 (Bankr. N.D. Iowa Feb. 16, 2018)

[1] Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff’d 563 B.R. 1 (8th Cir. BAP 2017)

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