Not to be too simplistic, bankruptcy is to help those people that have spent more than they earn. With the rapidly changing economic scenario in this country, student loans have become more prevalent. The question then becomes if, when, and how these loans can be discharged.
For most people, the answer to the first question is that these loans generally cannot be discharged. Student loans are not dischargeable under the Bankruptcy Code if (i) made, (ii) insured, or (iii) guaranteed by a governmental unit or (iv) made under any program funded in whole or part by a governmental unit or a nonprofit institution. The rationale behind this provision of the Bankruptcy Code is that lawmakers determined that individuals should not be allowed to take advantage of the benefits of the costs of education without paying for them. In that same theory, some bankruptcy courts have allowed discharges of student loans where the debtor in bankruptcy is the cosigner, not the student loan borrower.
The one way out of student loans is when continuing the debt would constitute an “undue hardship” on the borrower. The court is the one that determines what an undue hardship means and whether the situation qualifies under the Code and case law.
The procedure to attempt to obtain a discharge of student loan debts, after an individual files a bankruptcy petition, begins with the filing of an “adversary action.” This means that the borrower files a lawsuit, with a corresponding complaint, against the lender.
To show undue hardship courts have accepted a number of tests. One such is a mechanical test wherein the bankruptcy court evaluates a number of factors, including the number of the debtor’s dependents, and their ages and needs, health of the debtor and his or her dependents, access to transportation, level of education attained by the debtor, day-to-day living expenses, marketability of the debtor's job skills, current income, and other sources of wealth.
Another test courts have looked at is whether the borrower has made good faith attempts to pay of the educational loan as well as obtain and retain employment. One last test bankruptcy courts use is to look at the “totality of the circumstances” to determine what is most equitable under the given situation.
As stated above, in the great majority of cases, student loans will not be discharged. However, because each case is different, and the courts do allow for discharge in limited circumstances, call the Henshaw Law Office today to see whether your case may be one of those where an undue hardship may be found.
