Know Your Rights

Discharging Student Loans in Bankruptcy

It has been said that it is impossible to discharge a Piggy _bankstudent loan in bankruptcy.  While indeed it is a very difficult debt to discharge, it is not impossible.  In fact, one collector had been found liable under the Fair Debt Collection Practices Act for representing to a consumer, while collecting a student loan, that the loan was not eligible for  discharged in bankruptcy.  See Easterling v. Collecto, Inc., 692 F.3d 229 (2d Cir. 2012).

While  discharging a student loan may be a very difficult proposition, it is not impossible, and the loans are not ineligible for discharge.  According to the bankruptcy code, a student loan debt is considered non-dischargeable unless excepting it from discharge "would impose undue hardship on the debtor and the debtor's dependents."  11 U.S.C. ยง523(a)(8).  Naturally, there are a multitude of consumers out there that can fairly claim that paying off their student loans is causing an undue hardship on them and their families.   However, the test for what makes an "undue hardship" is where it gets difficult.  There are several factors that are considered:

Debtor must show that he or she cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and the debtor's dependents if forced to repay the loan. 
Elements of a minimal standard of living consist of decent shelter and utilities, food and personal products, maintenance of vehicles, health insurance, and the ability to pay for medical or dental services should the need arise.  A person should be entitled to these basic necessities.  If repaying the student loans prevents the debtor from being able to have these, then this would weigh in favor of discharge.  But that is not all.
Debtor must show additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the loans.
In this, the debtor must essentially show that they are hopeless, and this is certain for the foreseeable future.  Factors to consider are whether the debtor's earning capacity has peaked, or their earning capacity has diminished on a somewhat permanent basis, age of children, age of the debtor, and evidence of mental or physical impairments.  Moreover, the length of time considered in the future is not perpetual, its for a significant portion of the original repayment period. 
Debtor must show he or she have made good faith efforts to repay the loans.
In this, there is not too much guidance.  Essentially, a debtor has to show that the obligation has not been avoided altogether - that some efforts have been made in the past to keep current with the obligation, but that the debtor is no longer able to keep paying and maintain a minimal standard of living. 
There are other hardship standards that have been considered by bankruptcy courts.  For instance, one court used a "totality of circumstances" test wherein it considered (1) the debtor's past, current, and reasonably reliable future financial resources; (2) the debtor's and his dependent's reasonably necessary living expenses; and (3) any other relevant facts and circumstances. 

Thus, discharging student loans can be done.  The courts can be very tough on debtors who try, but it is possible.  Therefore, don't believe the debt collectors of these loans when they tell you the debt can never go away. 

SmithMarco, P.C. has been protecting consumer rights since 2005. Contact Us for a free case review. 

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