Most people I talk to are painfully aware that under current bankruptcy law the general rule is that student loan debt can't be discharged in a bankruptcy. This, of course, begs the question, can student loan debt ever be discharged. The answer is yes, but it is very difficult.
The exception to discharge for student loans resulted from publicity over a supposed flood of bankruptcies in the early 1970s filed by students who were just finishing their education with the purpose of discharging their student loans before they started earning money. Generally, if a student loan debt is nondischargeable, postpetition interest on the debt is also not discharged. Some courts have held, however, that contractually imposed liquidated damages for nonpayment of student loans are dischargeable, because the penalties are not debts for an "educational loan."
Currently, the sole exception to the nondischargeability of student loans is available when excepting the debt from discharge would cause the debtor of the debtor's dependents "undue hardship."
Courts have long struggled to define the term undue hardship. Although most of the published opinions on the subject agree that "undue" means more than the "garden variety" hardship that arises from the expense of future payments, each judge seems to bring a unique set of values to the process of defining and implementing the applicable standard.
Several circuit courts of appeals have adopted a definition of undue hardship that employs a three-part test. Under this test, undue hardship exists if:
The debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and the debtor's dependents if forced to repay the loans;
Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
The debtor has made good faith efforts to repay the loans.
In evaluating student loans that were incurred for vocational school education, two additional considerations related to discharge are appropriate. First, the student's undue hardship argument may be strengthened if the student loan arose from a private vocational school that closed down or defrauded the student. Moreover, evidence that a student obtained no benefit from a trade school education is relevant to the issue of whether the debtor will be able to pay in the future, because it suggests lack of skills necessary to obtain income for repayment.
The prong of the test that primarily gives debtors the toughest time is the requirement that additional circumstances must be proven to exist that would indicate that the circumstances that have caused the undue hardship are likely to persist for a significant portion of the repayment period. For example, this means, it's not enough to establish that a medical injury will prevent you from working in a particular field for a period of time. A debtor would be required to prove that a particular medical injury will practically permanently prevent him from working in a particular field.
Whether or not your student loan debt may be subject to discharge will be determined by the specific facts of your case. However, my guess is that most people, who are struggling from the basic financial distress of today's economy, will not qualify to have their student loan debt discharged in a Chapter 7 bankruptcy.
James Sansone is an experienced Santa Rosa bankruptcy lawyer and his office serves clients throughout Sonoma County, Mendocino County, and Lake County, including Santa Rosa, Petaluma, Cotati, Rohnert Park, Sebastopol, Healdsburg, Sonoma, Kenwood, Glen Ellen, Windsor, Bodega Bay, Ukiah, Willits, Clearlake, Lakeport, and Kelseyville.
