Saturday, February 5, 2011

Discharging Student Loans in Bankruptcy

             Unfortunately, as a bankruptcy lawyer, I often have to advise people that discharging student loans in bankruptcy is an uphill battle.  Student loan debt is typically not discharged in bankruptcy, but it is possible for some debtors to discharge their student loans.  In order to attempt to discharge student loans, the debtor must file an adversary proceeding in their underlying bankruptcy case asserting that the loan should be discharged.  An adversary proceeding is basically a lawsuit in the bankruptcy court that is related, but separate from the underlying bankruptcy case.  An adversary proceeding is much more like typical civil litigation with discovery, depositions and summary judgment motions than the underlying bankruptcy case, which typically only has one meeting of creditors and no hearings in front of the bankruptcy judge.  In addition, since an adversary proceeding requires a lot of additional work and time, bankruptcy attorneys almost never include representation in an adversary proceeding in a flat fee bankruptcy case.  It is typical for bankruptcy attorneys to charge an hourly rate for representation in an adversary proceeding.

           In order for a debtor to win an adversary proceeding asserting dischargeability of student loans, he or she must show that the student loan debt causes an undue hardship.  However, an undue hardship is not defined in the bankruptcy code.  Therefore, what exactly qualifies as an undue hardship is determined by caselaw.  In the Southern District of Indiana Bankruptcy Court in order to prove undue hardship a debtor must prove the following:
1.  he cannot maintain, based on his current income and expenses, a minimal standard of living for himself and his dependents if he is forced to repay the loan; and
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 loan; and
3.  the debtor has made a good faith effort to repay the loan.

         It is important to note that all three of the above factors must be proved by the bankruptcy debtor to the judge or the judge will rule against the dischargeability of the student loan.  Therefore, the judge will start his inquiry examining the debtor's living expenses.  Specifically, the judge will examine the debtor's living expenses are reasonable and whether repayment of the student loan will leave the debtor unable to provide a minimal standard of living for himself and his dependents.  If the judge feels that the debtor's expenses are inflated or that he has enough money to pay the student loan based on the debtor's income,  the inquiry is over and the student loan will not be discharged in your bankruptcy.

        If the debtor is able to prove the first prong of the above test, the judge will examine whether the circumstances that would make it a financial hardship to repay the student loan will persist for a significant portion of the repayment period of the student loan.  Therefore, if the reason that the debtor would not be able to maintain a minimal standard of living while repaying a student loan is that he has recently been diagnosed with a disease that makes it impossible for him to work the judge would decide whether that circumstance will continue for a significant portion of the repayment period of the student loan.  For example, if the debtor had cancer when he filed the adversary proceeding, but the cancer goes into remission by the time the judge hears the adversary proceeding and the debtor is able to go back to work making enough money to repay the student loan the debtor is likely going to lose the adversary proceeding.  On the other hand, if the reason the debtor had to file bankruptcy in the first place was that he had massive medical bills and the debtor has a disease that is permanent and will not be able to work at any point in the near future, there is a good chance that the judge will find the debtor meets the second prong of the test.

       If the debtor are able to prove the first two prongs of the test, the Court will look at whether he has made a good faith effort to repay the loan.  The more payments the debtor has made and the greater the period of time that has passed since the student loan proceeds were distributed, the better the chances of discharging the student loan.  On the other hand, if the debtor took out a $10,000.00 loan 10 months prior to filing bankruptcy and made one $200.00 payment on it prior to the filing of your petition, chances the debtor will not meet this test and will be stuck paying on the student loan after bankruptcy.

      If you are reading this thinking that it is tough to have your student loan be determined non-dischargeable you are right.  I typically tell my clients at Halcomb Singler, LLP, that they don't really want to be the debtor who is able to discharge their loan because it usually requires them to be in a very bad financial situation and often a poor state of health or some other factor beyond their control.  However, it is important to not that it is not impossible to discharge a student loan in bankruptcy.  

     If you are considering bankruptcy and live in the Northern Indianapolis, Carmel, Fishers, Noblesville, Zionsville, Tipton or Anderson please feel free to contact me at 317-575-8222 or just click here.  There is no fee for this consultation and I would be happy to answer your questions about bankruptcy.  

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.


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