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?
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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