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Discharging School Loans in Bankruptcy

Oct. 5, 2020

The Bankruptcy Code excepts from discharge "an obligation to repay funds received as an educational benefit," unless doing so imposes an undue hardship on the debtors and their dependents. 11 U.S.C. § 523(a)(8)(A)(ii). What is an undue hardship? How is that “imposed” on the debtors and dependents?

The Bankruptcy Code does not treat student loan debt in the same way as medical bills and regular consumer debts like credit cards.

This “undue hardship” requirement is inadequately defined by statute. Considering this, bankruptcy judges apply the standard through various tests and varies by jurisdiction. It becomes a question for the debtor to prove undue hardship, and this is done through an expensive, long process of litigation. This is not a part of the initial petition filing process. It's also hard to prove. Of course, the lender will definitely present competing evidence against the debtor.

On Tuesday, 09/29/2020 House Democrats are drafting HR 2648, known as the Student Borrower Bankruptcy Relief Act, in order to provide bankruptcy relief for student borrowers. In effect, the intent is to amend and even strike the portion of the U.S. Bankruptcy Code that disallows discharge and allows student loans to be discharged in bankruptcy. These constraints were originally applicable to federal student loans, but were later covered private student loans following the 2005 Bankruptcy Reform Bill.

But the bill must pass the Senate. That remains to be seen. School debt discharge has long been a source for political debate as well and is no stranger to this coming elections platform.

If you're thinking the Means Test will allow for the deduction of student loan payments, think again. This analysis does not allow for student loan payments to be deducted like medical bills or credit card payments.

Knowing what the courts define as special circumstances and undue hardship is the key to understanding whether your school loans will be discharged or not. You will need to gather your evidence very carefully because the burden of proof is on you to persuade the Trustee you cannot pay. Your proof is going to be the most positive outcome if you prepare properly.

This blog is intended for information purposes only and does not establish legal representation or financial guidance.