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Discharging Student Debt and the Undue Hardship Standard

Bankruptcy is a tool that often can be used to pull one out of debt and start new. Specifically, Chapter 7 Bankruptcies are often used by individuals to try and turn a new page, to bring about a fresh financial start. In a time when credit is easily accessible, and debt can quickly build up, Bankruptcy can offer relief from multiple types of debt; however, there is one specific type of prevalent debt, that the Bankruptcy Code explicitly makes difficult to discharge, student loans.

The Bankruptcy Code excepts certain types of debts from being discharged in Bankruptcy; for example, criminal penalties, tax penalties, child support, and most significantly, student loans. This means that even if a debtor qualifies for Bankruptcy, finishes the appropriate steps to obtain a discharge of debt, these individual exceptions to discharge listed in Section 523 of the Bankruptcy Code, will prevent one from getting rid of certain types of debt in most cases. That does not mean that Bankruptcy is not an option for those with excessive student loans, it just means that before entering Bankruptcy, a debtor must be aware of the limitations the Bankruptcy Code puts on student loans, and the likelihood of those debts being washed away through the Bankruptcy process.

While it is difficult to discharge student loans in Bankruptcy, and one should not enter Bankruptcy for the sole purpose of discharging student debt without first consulting an experienced Bankruptcy attorney, it is not impossible to discharge student debt, and the law has begun to shift in a way that could make it easier to discharge student loan debt. The current standard for student loan debt in Bankruptcy, is that the debt must not be discharged, unless excepting the debt from discharge will impose an undue hardship on the debtor and the debtor’s dependents. This means that a Bankruptcy Court is going to start an analysis of student debt from the perspective that it should NOT be discharged. In order to get that fresh start that Bankruptcy can provide, a debtor has to overcome the substantial hardship burden.

While the law has not settled on what merits a substantial hardship that would compel a Bankruptcy Court to discharge student loan debt, it is clear that the bar is still very high. Most courts have held that if after accounting for a debtor’s necessary expenses, such as mortgages, car expenses, child care costs, food, and other basic expenses, if the debtor has any excess income, they should use that income to pay down their student loans. This means the court will not discharge the student loan debt, leaving the debtor in a similarly dire place as when they entered Bankruptcy. Courts will look to factors such as a debtor’s profession, their education, their age, health, capacity to work, and make a determination on the debtor’s ability to pay back their student debt in the future.

Understandably, this is a frustrating standard. When someone enters Bankruptcy, they are presumably in a difficult financial situation, and the court wants to use abstract factors to extrapolate one’s ability to pay often excessive student debt. This is the argument that many hope will continue to gain traction in future Bankruptcy cases. That a debtor should be able to truly get the fresh start that Bankruptcy offers. Student loans make up a significant portion of debt in America today, especially among young college graduates. While courts will always be weary of allowing a free pass to those who want to graduate college and get a free discharge of their student loans, they are becoming more receptive to the idea that we should take a much harder look at student debt, and how we treat it in Bankruptcy.

While the trend may be headed towards a more flexible standard to discharge student debt in Bankruptcy, a majority of courts are still reluctant to say a debtor’s student loans merit an undue hardship exception. If you are contemplating Bankruptcy, and one of the primary reasons you are seeking debt relief is student loans, it is vital that you consult with an experienced Bankruptcy attorney to determine if you could qualify for a discharge of student loan debt in Bankruptcy. The attorneys at Arnold & Smith are experienced in all types of Bankruptcy cases, and most importantly are willing to fight for you in any way to achieve the ultimate goal of a fresh start.