Published on:

Can the Possible Tax Liability for Forgiven Federal Student Loans lead to an Undue Hardship for Bankruptcy Discharge? Iowa appellate court ruled recently that a Income Driven Plan with a zero payment “does not ameliorate the undue hardship”.

In In re Martin, out of the Northern District in Iowa (8th Circuit) the lender argued that the debtor was not entitled to discharge the loans because she would qualify for an income-based repayment program, or IBRP, where she would qualify for a zero payment.  In 20 or 25 years, whatever is left on the loans would be forgiven, but the forgiveness could be considered taxable income.

In 20 or 25 years, the debtor would be 70 or 75 years old, and whatever savings she amassed would be consumed by the maturing tax liability.  In other words, Judge Collins said, the “tax liability could wipe out all of debtor’s assets not as she is approaching retirement, but as she is in the midst of it.”

One thing the Court did not address as another possible way out is a Total and Permanent Disability Discharge – which is an administrative process through the Department of Education.  Once a physician certifies that someone is unable to work, or they obtain a Social Security Disability ruling with a 5-7 year review period, a student loan debtor can obtain a full discharge of their federal student loans.  That discharge is now tax-free until 2025 under the recent tax bill that passed, see our earlier blog “Tax on Death and Disability Discharges is Gone . . . For Now.”

There are usually solutions to every problem – we have found we can help at least 9 out of 10 student loan borrowers drastically reduce their debt one way or another.  Some solutions involve bankruptcy, some do not.


To Schedule a Consultation
Contact Information