Help Center – Student Loan Discharge

Disputing Loans by Adversary Lawsuit

The problem with student loans is that the borrower’s ability to repay the balance in the future is never considered when the loans are taken out.  Hence, there are many former students who end up with school loans that they cannot afford to repay which results in defaulted loans.  There are various reasons for why so many individuals find themselves unable to pay their student loans – some are a result of abusive over-borrowing, while other students could not complete the desired education program and thus never reach the higher earning potential they had hoped for, and finally, some simply can never attain the needed earning power to repay the borrowed loans due to poor economic conditions or mismanaged career expectations.

In 1998, there was a significant change to the bankruptcy law under Chapter 7 and Chapter 13, which made it difficult to have student loans discharged as party of the bankruptcy proceeding.  The change meant that even if you declare bankruptcy, you could still have to pay back all outstanding student loans.  Recognizing that this policy could create tremendous financial burdens on some individuals or families, a three part test was established to determine hardship.

Student loans are not usually discharged in Chapter 7 bankruptcy. It is difficult, but not impossible, to do so if you can show that payment of the debt “will impose an undue hardship on you and your dependents.”  See 11 U.S.C. § 523(a)(8). Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy process. You must file a petition (i.e. Adversary Proceeding) which prompts the bankruptcy court to decide the issue.

Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test, which requires a showing that (1) the debtor 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 student loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor has made good faith efforts to repay the loans.  Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).  However, not all federal circuits use Brunner; some courts may actually be more flexible.  Because the standard for discharging student loans can be different in different parts of the country, you should talk to an experienced bankruptcy attorney in your jurisdiction if you are considering bankruptcy and hope to discharge a student loan debt.

The issue of “dischargeability” of a student loan in question has to be raised in an Adversary Proceeding (which, as mentioned above, is a separate lawsuit in the bankruptcy court) and is conducted like other civil lawsuits.  Unlike a bankruptcy case, where relief is automatically available absent misconduct, the judges’ discretion controls the dischargeability of Student Loans absent a purely abusive finding on appeal. It is extremely difficult to attempt such a proceeding without an attorney.  Currently, there is no court filing fee assessed when a bankruptcy debtor files an Adversary Proceeding to determine the dischargeability of a debt.  Typically such a proceeding takes between six (6) and nine (9) months to be heard and involves a trial that lasts only an hour or two.  The relevant facts typically center on the debtor’s earning capacity, and necessary spending needs. See Student Loan Discharge Guide or the other products for helpful information about improving your chances of successfully reducing your loan debt or discharging your loans all together.

Sometimes a Student Loan Adversary Proceeding can be settled with attractive payment terms, compromised totals, reduced interest rates, or using other legal techniques. To learn more about these legal techniques, checkout the legal products. There is conflicting authority on whether or not a bankruptcy judge can discharge part of a loan or one of many loans and not the others. Keep in mind that if you are able to discharge any student loans, you will be responsible to pay the taxes on the amount of the debt discharged by the court. Before pursuing a loan discharge,  we urge you to exhaust all other options such as loan forgiveness, federal loan consolidation, or private loan consolidation

The treatment of student loans in bankruptcy is of concern to a large number of former students.  Frequently there is much confusion about the potential bankruptcy relief available from student loans.  There are many websites that provide information about student loans in general without an emphasis on bankruptcy’s effect.

Student Loan Discharge Guide
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