Questions and answers on the law | Discharging a student loan in bankruptcy is a doozy | Columns


Speaking of getting rid of student loans (which was discussed in this spot last week regarding government loan waivers), can bankruptcy be used to erase student loan debt?

Yeah, but it’s harder than a barrel of nails to do it.

The Bankruptcy Code, which is exclusively legislated by the U.S. Congress, states that government-backed student loan debts are not automatically written off (called “discharge”) upon a person’s bankruptcy. They are only released if the debtor (the person seeking bankruptcy relief) shows that maintaining the debt will result in “undue hardship”.

Congress has not defined its term “undue hardship”. Thus, nearly all bankruptcy courts (including those in Illinois) have concocted a three-part test to demonstrate undue hardship.

And it’s a doozy.

The debtor must prove: 1) that he will be unable to maintain a minimum standard of living and fall below the poverty line if the student loans have to be repaid; 2) the debtor will suffer from circumstances that will make repayment difficult for the remainder of the term of the loan, or permanently; and 3) the debtor made a good faith effort to repay the loan.

In order to show all of this, the debtor must file a lawsuit in the bankruptcy case against the creditor holding the student loan and have a full trial with witnesses, documents, and courtroom luster.

Thus, the debtor must first establish the inability to maintain a minimum standard of living. The debtor’s financial situation, such as monthly income versus reasonable and necessary living expenses, is key to this. Non-essential expenses like cable and fitness subscriptions will not be warmly welcomed.

The judge must then decide whether this financial situation should be permanent, or at least last longer than the term of the loan. The debtor’s education or health are factors to consider in this crystal ball.

The third test, after making a good faith effort to repay, is a final nail in the coffin of no discharge.

Some factors have asked you for income-based loan repayment plans; have you made any payments at any time for the overall balance; and is the loan a significant portion of your overall debt.

If you have never made a payment attempt, you can still answer this third test. However, you will need to show the existence of a super-duper proof.

Some bankruptcy courts grant a partial discharge of student loans if the debtor has not proven they are entitled to the full amount. Information about the debtor’s income and expenses is used to determine how much the debtor can afford to pay. In some cases, a court may adjust the interest rate or other terms of the loan to facilitate repayment.

By the way, some bankruptcy courts have also ruled that student loans from private lenders are automatically forgiven, just like most other debts.

Some members of Congress are preparing to amend the Bankruptcy Code to eliminate the “undue hardship” requirement. Student loan debts are the only debts under the Bankruptcy Code that require debtors to demonstrate “undue hardship” in order to be discharged.

Perhaps with a new legal claw hammer, the nails in the coffins of student loan debtors can finally be pulled out.

Brett Kepley is an attorney with Land of Lincoln Legal Aid Inc. Send your questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.

Brett Kepley is an attorney with Land of Lincoln Legal Aid Inc. Send your questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.


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