Student Loans and Bankruptcy

Are student loans dischargeable in bankruptcy?

by an experienced bankruptcy lawyer in Arizona – Christopher H. Ariano

If you are saddled with student loan debt you are most definitely not alone. A common worry is that there is nothing you can do about student loan debt with bankruptcy. This is probably because the Bankruptcy Code says educational loans are nondischargeable unless continuing payments are an “undue burden” on the debtor. 11 U.S.C. Section 523(8) (2010). However, there is a possibility that you could partially or fully discharge your student debt. As long as you can prove that the loan payments will be an undue burden, you may be able to wipe away your student loan debt completely with bankruptcy.¹ If you have already filed for bankruptcy but did not request a review of whether you qualify for undue hardship, your case can usually be reopened so you can file the paperwork for this proceeding.²

What Qualifies as an “Undue Burden?”

Although student loan payments may always feel like an undue hardship, proving undue burden under the law may be a little bit trickier. First, you have to file a petition for an adversary proceeding to determine whether your situation would make student loan payments an undue burden.³ Next, you need to show an undue burden or hardship by a preponderance of the evidence, which much be something more than just financial challenges.⁴

There have also been multiple tests employed depending on the state your reside in. For example, the Brunner test requires the debtor to demonstrate (1) the debtor can maintain, based on current income and expenses, a minimal standard of living if forced to repay loans, (2) additional circumstances exist indicating this state of affairs is likely to persist for the repayment period of the student loans, and (3) the debtor has made a good faith effort to repay the loan.⁵ The second part of the test is often the most difficult to prove. In the Ninth Circuit the assumption is the debtor’s income will grow so payments will be easier to make.⁶ However, the Ninth Circuit has also listed more circumstances the court can consider when evaluating this second prong, such as underemployment and poor quality of education.⁷ The other good news is in the Ninth Circuit the bankruptcy court has granted partial discharge of bankruptcy before.⁸

Some examples of undue hardship include where the student went to a school that turned out to give a fraudulent education without much benefit or a college-educated couple who  have income but barely live above poverty level.⁹ Other instances where the courts have favored discharge include when the debtor is disabled and recovery does not appear to be apparent within a reasonable period.¹⁰

There is no formula for determining whether you will be eligible for discharge of your student loans due to undue hardship. It is best to consult an experienced Phoenix bankruptcy attorney to assess your situation and where to go from there.

Chapter 13 Bankruptcy

If you cannot discharge your student loan debt under Chapter 7 bankruptcy you may want to look into a Chapter 13 reorganization plan. You would still owe the remainder of your student debt but your plan would determine the size of your payments instead of the entity that holds your student loan.¹¹

To see if any of these plans could work for you and your situation with student debt, contact a Phoenix bankruptcy attorney who can guide you in your individual situation.

[1] Bankruptcy, Studentloanborrowerassistance.org, http://www.studentloanborrowerassistance.org/bankruptcy/ (last visited Feb. 28, 2014).

2 Id.

3 11 U.S.C. § 523(a)(8) (2010).

4 Leslie Treff, “Undue Hardship” Under Section 532(a)(8): Can the Debtor’s Student Loans Be Discharged?, lexisnexis.com (Oct. 29, 2012 1:40 PM), http://www.lexisnexis.com/legalnewsroom/bankruptcy/b/bankruptcy-law-blog/archive/2012/10/29/quot-undue-hardship-quot-under-§-523-a-8-can-the-debtor-s-student-loans-be-discharged.aspx.

5 Id.

6 See generally Educ. Credit Management Corp. v. Nys, 446 F.3d 938 (9th Cir. 2006).

7 Kathleen Michon, Discharging Student Loans in Bankruptcy: The Western States, Nolo.com, http://www.nolo.com/legal-encyclopedia/discharging-student-loans-bankruptcy-the-western-states.html (last visited Feb. 28, 2014).

8 Id.

9 Bankruptcy, supra note 1.

10 Treff, supra note 4.

11 Bankruptcy, supra note 1.