Student Loan and Bankruptcy
Student loans are not dischargeable and we are separately handling them here in this post. Students loans are the most difficult areas of debts which cannot be discharged: they survive bankruptcy and are exempted from bankruptcy. The department of education has been pursuing student loans aggressively for many years. In fact, federal government considered them as guaranteed loans meaning if the student does not pay, the fed would come and pay for it, and then pursue it independently against the students. It is good to get forbearance if you are falling too far behind on your student loans.
Can Student Loans Be Discharged?
Yes, they can be discharged only in very “undue hardship” cases. Bankruptcy Code has not defined undue hardship. However, various courts have developed tests for determining what is a hardship case.
For example, the United States Court of Appeals for the Seventh Circuit has developed a three-part test. Under this test, a debtor must show:
(1) that he or she cannot maintain, based on his or her current financial situations, a minimal standard of living for himself or herself and his or her dependents if forced to repay the loans,
(2) that other circumstances exists indicating that the debtor will remain in the same financial situation for a significant period fo time; and
(3) that the debtor has made good-faith efforts to repay the loans.
The debtor has the burden of proof to establish these factors demonstrating undue hardship. In Goulet v. Education Credit Management Corp, the Seventh Circuit rejected the claims of a fifty-five-year debtor that he had an undue hardship defense to paying the student loans. The debtor argued that his substantial debt, a prior felony conviction, and a substance-abuse problem constituted extraordinary circumstances sufficient for a fining of undue hardship. The Seventh Circuit disagreed, focusing on the fact that the debtor had obtained a quality education with the money borrowed through his student loans.
“the natural conclusion, when considering his exemplary education record and nearly completed graduate work, is that Goulet can apply himself when he desires to do so,: the court wrote. “The record does not demonstrate that he lacks the capacity tow ork, only that he does not seem anxious to do so.” (284 F.3d 773 (7th Cir. 20020).
Again, a federal district court in Florida reached a similar result in In Re Mallinckrodt, which involved a 42 years old debtor who had more than &70,000 in student loan debt. The debtor had a master’s degree in psychology and had worked as a tennis instructor, but had a very small income. The court determined that the debtor failed the “other circumstances” prong of the undue-hardship test, on account of the fact that the debtor “has nothing but opportunities to earn more income.” (274 b.R. 560 (S.D. Fla. 2002)