The South Carolina Bankruptcy Court recently issued an opinion clarifying the circumstances in which it is possible to obtain a discharge of student loans. Many consumers contemplate bankruptcy, at least in part due to significant student loan debt, so understanding the law in this area is important.
The basic rule about student loan debt is that it is not dischargeable in bankruptcy unless continuing payment obligations would impose an “undue hardship” on the borrower. To prove undue hardship, a debtor must show that (1) he cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay the loans, (2) additional circumstances exist indicating that his financial situation is likely to persist for a significant portion of the repayment period for the student loans, and (3) he has made good faith efforts to repay the loans.
In In re Straub, South Carolina Bankruptcy Court Judge David Duncan held that a debtor who filed for bankruptcy under Chapter 7 was ineligible for a discharge of student loan debt because she failed to show “undue hardship.” Judge Duncan explained that the debtor was ineligible for discharge in part because the debtor was eligible for loan-repayment assistance that could significantly reduce the burden of repayment. Judge Duncan also explained that the debtor was ineligible because she failed to show any “exceptional circumstance” that would prevent gainful employment and loan repayment. The debtor, for example, had no signs of a physical disability and was gainfully employed. Finally, Judge Duncan refused to discharge the debtor’s student loans because she failed to provide any evidence of good faith efforts to repay the loans. She never, for example, sought loan consolidation, offered a compromise payment to her lender, or otherwise offered to pay or settle the obligation in a meaningful manner.
In re Straub provides two important lessons for consumers with large amounts of student loan debt: First, student loan debts are difficult to discharge in bankruptcy. Second, consumers can improve their chances of obtaining a discharge by doing what they can to manage their student loans before filing for bankruptcy. Efforts to consolidate the loans or make compromise payments could go a long way toward improving your chances of obtaining a discharge. If you are contemplating bankruptcy and have significant student loan debt, be sure to talk to a bankruptcy attorney to determine whether your debt could be dischargeable.
Special thanks for this great guest post from Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.
Section 523(a)(8) of the Bankruptcy Code provides that student loans are dischargeable when repayment would impose an “undue hardship.” The Brunner doctrine now says undue hardship means: (1) not just an undue hardship, but an absolute impossibility (the debtor can’t pay and still maintain a minimal standard of living); (2) there are additional factors that prove hopelessness is permanent; and (3) the debtor has already made efforts to repay. In addition, our Fourth Circuit Court of Appeals has recently added a fourth requirement–that the debtor must have attempted the Ford Income-Contingent Repayment Program. Bottom line: Courts have decided that student loans should be almost impossible to discharge.
There are important lessons here for consumers. First and foremost, you must protect yourself. As I recently told one of my daughter’s friends, “owing student loans is like owing the mob.” If at all possible, don’t take out student loans. And if you must, keep those loans to a minimum.
Student loan lenders have engaged in reckless lending practices because they know the debts are virtually impossible for students to discharge in bankruptcy. Loaning Art History majors the same amounts as Pre-Med students is the norm, and there isn’t any consideration as to whether the students–usually young and financially unsophisticated–can repay the large amount they borrow. Loose lending practices have also led to sharp increases in tuition over the last 30 years, increases that have unjustifiably outstripped inflation. However, because students can pay more by borrowing more, educational institutions can charge more–and do. And now that even privately issued student loans are non-dischargeable, we’ve seen a sharp increase in schools and programs making these loans available. Many of these programs over promise and under deliver on the economic benefits to their students. Still, the students are left with the loans to repay regardless of whether they received any economic benefit from their education.
For more information on student loans, see parts one, two, and three of my series at Bankruptcy Law Network entitled, “The Worse Kind of Debt You Can Have: Student Loans.”