Student loans in bankruptcy

The borrower's bankruptcy options on student loans have shrunk to a very few.  Changes to the Bankruptcy Code in late 1998 made student loans non dischargeable, regardless of the age of the loan, unless the borrower can establish substantial hardship.  Changes in 2005 made even private student loans non dischargeable.

Outside of bankruptcy, a defaulted student loan can be rehabilitated, consolidated, stretched out or discharged due to disability . More >>

Student loans may be unenforceable where the school closed before you completed your course of study or because of wrongdoing on the part of the school. More >>

Absent a showing of substantial hardship, the best that bankruptcy can do with respect to student loans may be to eliminate other debts that compete for the borrower's dollars, or to provide a measure of peace during a Chapter 13 case.   Some courts will permit debtors to separately classify student loans in Chapter 13 and pay them a greater percentage than other unsecured debt.

It may also be possible to challenge either the enforceability or the accounting issues surrounding a student loan in bankruptcy.

Hardship discharge

Student loans are no longer dischargeable in bankruptcy just because they have been in pay status for a given period of time.  The only way the loan can be discharged is by proving that repayment of the loan will create an undue hardship on the debtor/borrower and his family. 

This standard is generally interpreted to mean that the debtor cannot maintain a minimally adequate standard of living and repay the loan.   It usually requires a showing that the conditions that make repayment a hardship are unlikely to improve substantially over time.  Many courts use the test for undue hardship found in the Brunner case.

Courts in some circuits will permit the judge to find that the debtor can repay a portion of the loan without hardship, and to discharge the balance of the loan.

To discharge a student loan in bankruptcy, the debtor must bring an adversary proceeding in the bankruptcy case.  The debtor must prove at trial that repayment constitutes undue hardship.

Contesting the enforceability of the loan

Student loans are contracts like any other loan and are subject to challenge for fraud, etc.  Also, students loans are not enforceable when the school has closed prior to the student completing his education.  These challenges could be raised in a Chapter 13 proceeding and decided by a bankruptcy judge.  In the usual Chapter 7, there is no dividend to creditors and thus no reason for the bankruptcy court to rule on the enforceability of a claim, outside of an adversary proceeding to obtain a hardship discharge.

Challenging the loan balance

A pervasive problem in student loans is the state of the lender's records:  the loan has been transferred several times and it is not clear just what is owed and whether all the additional charges are in accordance with law.  

Consider using an objection to the claim of the holder of a student loan  in a Chapter 13 to get a judicial determination of the rights of the borrower:  in bankruptcy, the burden of proof is on the creditor.  Once a judge decides what is properly owed, principles of collateral estoppel should make the decision of the bankruptcy court binding on the lender even if the repayment period on the loan stretches beyond the end of the plan.

Living with student loans

There is some small comfort in the federal regulations which restrict the amount of a student/borrower's wages that can be garnished to repay a student loan to 10% of the borrower's take home pay.  59 Fed. Reg  § 22473. 

Of course, the lender also has the right to intercept tax refunds and apply them to the loan.  More on collection on defaulted student loans. There's more at the Student Loan Assistance Center.

Get relief outside of bankruptcy

Various agencies offer information on workouts and consolidation programs for troubled loans, including a program of repayment based on your income.  Links to sources of more information.

Consolidation & repayment options  Department of Education website on consolidating student loans

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