Are Student Loans Dischargeable?

Can Student Loans be Discharged in Bankruptcy?

The answer, surprisingly is yes, but the road to discharge is long and hard. I decided to write this post because potential clients who have student loan debt instinctively tell me when the subject comes up that they “know” student loans are “never dischargeable” in bankruptcy, which just isn’t true. Now I freely admit that the process of getting a discharge is hard enough that for most people it is de facto non-dischargeable. My goal in this post is to shed a bit of light on what it takes to discharge a student loan debt. While the topic can get complicated, I hope that by the end you will have at least a general understanding of the topic.

The best place to start when talking about discharging student loans is the beginning. Sometime during the early 70s, Congress changed the law regarding the dischargeability of student loans as a reaction to stories of ne’er-do-well students who, after obtaining a prestigious degree – usually medical or legal – filed for bankruptcy promptly upon graduation to wipe out their student loan debts (oftentimes at the government’s expense). In response to these lurid tales, Congress made it harder to get out from under student loan debt by making such loans non-dischargeable by default. If the student could show that repayment of those loans would impose an “undue hardship” then he or she could get a discharge. Whether this fear of rampant abuse of the student loan system were real or imagined, this is now the system we operate under.

How do you get a student loan discharged?

When you file for bankruptcy all debts that are dischargeable are extinguished when the court grants the debtor a discharge, which is not true for student loans. You have to file what is called an adversary proceeding in bankruptcy court (essentially a civil trial) to have the court declare the debts are dischargeable. This can be expensive and time-consuming but it provides an opportunity for the debtor to submit evidence about their current inability to pay, something that you cannot really do when you are talking over the phone with a lender or loan servicer. I have seen cases where once the process gets started that the loan company makes a settlement with the debtor that works for everyone, so the opportunity is there to avoid a trial.

If a settlement cannot be reached then the debtor has the burden to prove an undue burden exists. In Maine, a debtors situation is analyzed under the totality of circumstances test. Under this test, the debtor must show that his or her financial resources (past, present and future) and necessary living expenses, when considered in conjunction with any other factors that might impact the debtor’s ability to repay the student loans, does not allow the debtor to repay the loans while maintaining a minimum standard of living. I don’t think you need to be a lawyer to understand that the debtor has his or her work cut out for them to prove undue hardship under this standard.

If, after trial, you show that paying your student loans will place an undue hardship upon your life then the student loan debts and associated interest and costs will be discharged unless the servicer or loan company appeals the ruling. Alternatively, if you lose at trial you now have the right to appeal. During the appeals process the reviewing court only considers legal arguments and you cannot introduce new evidence but if the case was a close one you might have another opportunity to get a ruling in your favor or to settle the matter on good terms.

So what are some of the things courts consider when determining if an undue hardship exists?

Listed below are some factors I have compiled from reading student loan discharge cases. I tried to write down factors that are cited by multiple courts but there is always the chance that a court hearing your case might come up with additional factors to consider or only consider some of the factors listed below. Still I think the list I have complied below is a good guidepost for what courts look at when considering undue hardship:

  • Has the debtor made reasonable efforts to find gainful employment? If the debtor is employed, has the debtor taken extra shifts or a second job?
  • Will the debtor’s income steadily increase over time or remain relatively stable?
  • Can the debtor only make loan payments by deferring other necessary expenses, such as home maintenance, medical care and auto repairs?
  • Does the debtor suffer from a long-term medical condition which impairs his or her future job prospects? Or is the condition only temporary or otherwise not an impediment to working?
  • Is the debtor nearing retirement age or just starting his or her working career?
  • How much time has passed since the debtor obtained his or her student loans and subsequently filed for bankruptcy?
  • Does the debtor have other assets that he or she can liquidate to pay something on the loan?
  • What is the availability of any Federal or state programs that might help the debtor that might reduce or eliminate payments? If these programs exist, has the debtor tried to take advantage of them?

In conclusion

Getting a discharge of your student loans is not easy but not impossible. Thankfully, whether or not you qualify for a student loan discharge, there are other avenues for dealing with your debts. Most student loan servicers offer programs like the income based repayment plan, which can reduce or eliminate your loan payments, or a hardship discharge, if your situation is bad enough. It all depends on your particular situation but you do have options to get relief if you cannot afford to make payments. If you have questions about whether bankruptcy may be an option to help you deal with your student loan debts feel free to call or email me.

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When is a Tax Return not a Tax Return?

In Re Giacchi, on appeal to the District Court E.D. of Pennsylvania

Good question. The answer can mean a great deal to a debtor trying to discharge a stale tax debt. Mr. Giacchi, hailing from Pennsylvania, sought out bankruptcy protection to try and discharge several years of unpaid tax returns, specifically 2000, 2001 and 2002. For reasons not explained, Giacchi did not file tax returns for those three years. It was only after the IRS examined those years and assessed taxes that Giacchi filed tax returns to report what he argued was the correct amount due. These returns were often filed several years after the original due date of the return; for example, Giacchi’s 2000 tax return was not filed until November 29, 2004 – more than three years after the original due date of April 15, 2001. Even though the returns were not filed on time, in each case, the IRS accepted Giacchi’s returns and adjusted the amount of taxes due to match the tax returns. In spite of this, Giacchi was still unable or unwilling to pay the amount due and in 2010, and again in 2012, he filed for bankruptcy protection.

While in bankruptcy, Giacchi attempted to get out from under his tax liabilities. He argued that while he did not file his return on time, each time he was notified that the IRS assessed a tax against him, he immediately filed a tax return; in fact, the IRS did not contest the returns as filed and adjusted his tax liability to match the returns. The problem for Giacchi, however, was that while he had prepared the correct tax form, with the necessary information to calculate his tax liability, mailed to the correct address and signed under penalty of perjury, what he filed was not, legally speaking, a tax return for bankruptcy purposes.

As a threshold matter, for a tax liability to be dischargeable, the debtor must file a tax return. Seems simple enough. Under the Bankruptcy Code, to meet the definition of a “tax return” a document must:

  • purport to be a tax return;
  • be signed by the taxpayer under penalty of perjury;
  • contain sufficient information to allow the IRS to determine if the proper amount of tax was calculated; and
  • represent an “honest and reasonable” attempt to satisfy the requirements of the tax code.

It is this last requirement that caused Giacchi’s ship to founder. A late filed return, filed post-assessment, is treated as being untimely by the courts; by not filing a return in a timely manner, Giacchi did not show that he was making an “honest and reasonable” attempt to satisfy the tax code, which meant that his tax debts were nondischargeable. The court did leave open the possibility that a debtor who has a good reason to file a late return, filed after an IRS assessment, might still receive a discharge of those taxes. Giacchi, however, failed to provide any excuse for the late filing, beyond stating that by filing his tax returns he reduced his tax liability, which the court rejected as not being a legitimate tax purpose. If, the court noted, the debtor only had to show that the IRS did not correctly calculate his or her tax liability then ” ‘the availability of a discharge would turn on the IRS’s accuracy in assessing taxes, rather than on [the debtor’s] sincerity and diligence in complying with the tax code.’ ”

So the question of whether a tax return is indeed a tax return can make a big difference for a debtor seeking to discharge an old tax debt. While the court did not address whether or not a merely filing a return late, without an IRS assessment, is dischargeable or not, it is clear that waiting to file a return until after the IRS comes a knockin’ can be detrimental to your financial health.