1. What sort of standard does the court identify here for future debtors when it says petitioner Baker had “truly fallen on hard times”? What sort of standard would you propose?

2. Presume Mrs. Baker did her best at each institution but still ended up either without the soughtafter degree or without a job commensurate with the money expended to qualify for it. Does the government, as guarantor of such educational loans, find itself being forced into evaluating how successful each applicant may be before issuing them the money?

Prior to 1976, a student could attend school on student loans guaranteed by the government and then discharge them immediately upon graduation, before starting employment, under the terms of the Bankruptcy Act. Congress ultimately closed the loophole except for those for whom paying back the loans posed an “undue hardship.” Mary Lou Baker filed for bankruptcy protection under the “undue hardship” provisions to relieve her of the burden of repaying educational loans totalling some $6,635. The loans were from three institutions of higher learning: The University of Tennessee at Chattanooga, Cleveland State Community College, and the Baroness Erlanger School of Nursing. Mary Lou Baker was a mother of three with a monthly take-home pay of less than $650. Her monthly expenses for herself and the children (her husband had left town) were nearly $1,000. She did not receive any public aid and had no other income according to the record. However, just prior to filing this action, her church had paid her January heating bill to prevent her from being without heat in her home.

Of her three children, one had difficulty reading and another required special and expensive shoes. Baker herself had not been well and her medical bills had gone unpaid prior to the bankruptcy filing. In the bankruptcy petition she filed, Mrs. Baker seeks a discharge of her educational loans based on the hardship provision. 

Ralph Kelley, Bankruptcy Judge, rendered the court’s decision: “In 1976 the Congress passed the Educational Amendments which restricted a discharge in bankruptcy (of student loans). The restriction was designed to remedy an abuse by students who, immediately upon graduation, would file bankruptcy to secure a discharge of educational loans. These students often had no other indebtedness and could easily repay their debts from future wages . . . In passing the Educational Amendments of 1976 and including these amendments in the Bankruptcy Reform Act of 1978, Congress intended to correct an abuse. It did not intend to deprive those who have truly fallen on hard times of the ‘fresh start’ policy of the new Bankruptcy Code.”

The court concludes that under the circumstances of this case, requiring the debtor to repay the debts owed to the three defendants of $6,635 plus interest would impose upon her and her dependents an undue hardship.