Chapter 7: Student Loan Debts

What can I do about my student loan debt?

student loanAfter a debtor files under Chapter 7, not all of the debts are always discharged when it is complete. It is difficult to convince a court to discharge student loan debts.

Undue Hardship

For the debtor to qualify for a discharge of student loans, they must show that they or their dependents would be caused an undue hardship by repaying the debt.

After filing for bankruptcy, the debtor must also file a formal complaint with the bankruptcy court (before the other debts are discharged), called a Complaint to Determine Dischargeability. It’s then up to them to prove to the court that payment of their loans will cause an undue hardship.

There is not a current definition from The Bankruptcy Code that determines whether a debtor will be granted a hardship discharge of a student loan. Different courts have different standards, but often apply tests to determine who is eligible. For instance, one method is called the Brunner test, and determines eligibility based on these factors:

1.       Poverty. Based upon the current income and expenses of the debtor, they are unable to maintain a minimum standard of living if they are forced to pay off the student loan;

2.       Persistence. The financial circumstance determined above continues for a significant duration of the repayment period, and;

3.       Good Faith. The debtor must show they have made a good faith effort to repay the loan prior to filing for bankruptcy.

Raising Defenses to Student Loan Debt

Although most courts aren’t likely to discharge student loans, it’s not impossible. If the debtor attended a vocational or trade school, they could have a defense for the student loan debt. Some examples are breach of contract, unfair or deceptive business practices, or fraud. They can raise these defenses in the creditor’s Proof of Claim. If this can be pulled off, they won’t owe the debt at all!

The debtor should also do research, and consider consulting with an attorney. Knowing what the past rulings from courts in their jurisdiction have been could help the debtor better approach their defense. If they decide to litigate either the dischargeability issue or a defense to the loan in bankruptcy court, They’ll most likely need an attorney to represent them – so consulting would be wise if the debtor has a large amount of student loan debts.

What happens if the student loans aren’t discharged?

Most of the time, the student loan debt will not be discharged. So what happens after that? Unfortunately, in a Chapter 7, that means the debt is still owed to the creditor.

In a Chapter 13, the debtor may be able to pay a lower amount during the repayment plan – but they will be required to pay the full amount remaining after the repayment period ends.

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