Attending college has essentially become a mandatory course of action people are expected to follow if they want to find a job that pays enough to support a family. The unfortunate corollary to this expectation is the reality that most college graduates must take out student loans to pay for their education. This need is primarily driven by the skyrocketing costs of higher education, with many schools raising tuition on a yearly basis. Coming out of school with this overwhelming burden of debt may lead some borrowers to consider bankruptcy. Chapter 7 bankruptcies allow debtors to discharge, or wipe out, most debt, but the rules for student loan discharge restrict when this particular obligation can be cleared. The issue of unmanageable student loan debt is well-known to most people, and in the context of for-profit universities, prompted the federal government to forgive student loans extended to attendees of the now-defunct Corinthian Colleges, Inc. However, former students are now reporting the Department of Education is seeking to collect on these loans despite policies promising loan cancellation. In this environment of assuming student loan debt which can haunt individuals into retirement years, understanding when this debt is eligible for discharge in Chapter 7 bankruptcy is important. Thus, an overview of this process will follow below.

Undue Hardship

U.S. Bankruptcy Code specifically excludes loans taken for educational purposes, unless repayment would impose an undue hardship to the debtor. Undue hardship is determined by a test established by the courts that looks at three issues: Standard of living, future financial resources, and a good faith effort at repayment. For the standard of living factor, courts assess whether repayment would drop the debtor below what is necessary to maintain a minimal standard of living. In other words, the debtor must provide evidence that repaying these loans will place him/her at or below the poverty level. Next, the debtor must show this financial situation is likely to continue throughout the repayment period, usually demonstrated by proving no jobs are available that would raise the debtor’s standard of living. Finally, the debtor needs to present evidence that he or she made a good faith effort to repay the loans, including the use of payment reduction plans available for federal loans.

All three factors must be proven, and the debtor must formally file a Complaint to Determine Dischargeability before the bankruptcy judge will decide if an undue hardship exists. Furthermore, courts will not discharge a portion of student loan debt, so it is all or none proposition.

Other Grounds to Contest Student Loan Debt

If proving undue hardship is unlikely, the debtor still has a few other options to wipe out student loan debt. There are certain defenses a debtor can assert against a creditor to avoid repayment, which are especially applicable to those that attended trade or vocational schools. Examples of these defenses include: Fraud, breach of contract, and deceptive trade practices. These defenses would apply, for instance, if a school deliberately misrepresented the type of employment and/or salary levels of past graduates as inducement to get new students. Note that the debtor must challenge the debt when the creditor files the proof and claim, and if successful, the debt is no longer owed.

Consult a Bankruptcy Attorney

If you have crushing debt, talk to a bankruptcy attorney about getting relief. Many types of debt are eligible for discharge in Chapter 7 bankruptcy, and an attorney can let you know if this type of bankruptcy is available to you. If you live in the Indianapolis area, attorney Christopher L. Arrington helps clients through the complicated, but worthwhile, bankruptcy process. Contact him today for an appointment.