Can bankruptcy eliminate my student loans?

With so many of my clients having large student loan debt, I wish I could say that bankruptcy would always eliminate their student loan debt. However, that is not the case and although student loans can be discharged in bankruptcy, the truth is it's very difficult to do so.

Since 1978 Congress has increased restrictions on bankruptcy debtors seeking to discharge student loan debt and under the current law, nearly all student loans are dischargeable only if the debtor can prove that repaying the debt would impose an “undue hardship” on the debtor and his dependents. This standard applies to both federal student loans and private student loans, although a bill was recently introduced in Congress which it trying to make it easier to discharge private student loans.

I would argue that student loans almost always impose a hardship on a debtor to repay, but that’s not the type of “hardship” that the Courts are talking about.  In the 9^th Circuit, which includes my area of practice in Chula Vista and San Diego, the bankruptcy courts have interpreted the “undue hardship” standard to be an exceptionally high bar.  It requires an Adversary Proceeding (lawsuit) to be filed in bankruptcy court.  This lawsuit requires the court to determine whether repayment of the debt would constitute an undue hardship.  At trial, the debtor must show that: 1) the debtor cannot maintain a minimal standard of living and also repay the loan; 2) the debtor’s financial inability to repay the loan is likely to continue for a significant portion of the loan’s repayment period; and 3) the debtor has made a good faith effort to repay the loan.  In one particularly harsh case out of Ohio, a bankruptcy judge told a blind debtor receiving $811 each month in social security disability that, “It remains to be seen . . . whether [the debtor] will find work or remain unemployed.”  Wallace v. Educational Credit Management Corp., 2010 WL 5764771 (Bky.S.D. Ohio Dec. 1, 2010).

Since a bankruptcy discharge in a Chapter 7 case is extremely difficult, I often place my clients into a Chapter 13 repayment plan in which the student loans are paid over time.  The Chapter 13 stops the student loan creditors from suing my clients so that my clients can concentrate on the repayment and not have to worry about their wages being garnished or their bank accounts levied.

After the bankruptcy case is concluded, non-bankruptcy options are available including deferment, forbearance, loan forgiveness, and income contingent repayment plans.  If you are experiencing financial difficulty and have student loans, call the Law Offices of Kerry A. Denton at Southbay Bankruptcy at (619) 421-1000 and discover your options from an experienced Chula Vista and San Diego bankruptcy attorney.