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. My goal is not to explain everything but provide you with 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 discharge?
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.
What if a settlement cannot be reached? Well then it is off to the races. To prevail, the debtor needs to prove an undue hardship exists and that his or her debts should be dischargeable. In Maine, a debtor’s 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 the debtor wins at trial, the student loan debt and associated interest and costs are discharged unless there is an appeal. The student loan servicer or loan company is provided a chance to overturn the court’s ruling. During the appeals process the appellate (or reviewing) court can only consider legal arguments and no new evidence can be introduced so if you have facts on your side you have a better chance of 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.
What does the court consider in finding undue hardship for a student loan discharge?
I put together a list of factors court consider when considering undue hardship. I think it is a comprehensive list but there is always a chance that a court may consider other things not listed. So don’t rely on these factors as gospel but something to consider.
- Has the debtor made reasonable efforts to find gainful employment? Does the debtor work extra shifts or have 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 student loan discharge is not easy but not impossible. If you do not believe your situation does not qualify you still have other options. Do not overlook programs offered by student loan servicers, such as income based repayment plan or a hardship discharge. While a lot turns on your particular situation, you do have options to get relief if you cannot afford to make full or partial payments on your student loans. If you have questions about whether bankruptcy may be an option to help you resolve your student loan debts than feel free to call or email me. I will be more than happy to discuss your options with you.
Photo courtesy of www.cafecredit.com