The Law Q&A | Student-loan discharge in bankruptcy a doozy – news-gazette.com

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Updated: September 18, 2022 @ 5:44 pm

Speaking of getting rid of student loans (which was discussed in this spot last week concerning loan waivers by the government), can bankruptcy be used to wipe out student loan debt?
Yes, but it’s tougher than a barrel of nails to do so.
The Bankruptcy Code, which is exclusively legislated by the U.S. Congress, says that student-loan debts backed by the government are not automatically wiped out (called a “discharge”) in a person’s bankruptcy. They are only discharged if the debtor (the person filing for bankruptcy relief) shows that keeping the debt will cause “undue hardship.”
Congress left undefined its phrase “undue hardship.” So, almost all bankruptcy courts (including those in Illinois) have concocted a three-part test for showing undue hardship.
And it’s a doozy.
The debtor must prove: 1) the debtor will be unable to maintain a minimal standard of living and go below the poverty line if the student loans have to be repaid; 2) the debtor will suffer from circumstances that make repayment a hardship for the remainder of the loan term, or permanently; and 3) the debtor has made a good faith effort to repay the loan.
In order to show all this stuff, the debtor has to file a lawsuit in the bankruptcy case against the creditor holding the student loan and have a full-blown trial with witnesses, documents and the courtroom chandelier.
So first, the debtor has to establish the inability to maintain a minimal standard of living. Vital to that is the debtor’s financial situation, such as monthly income versus reasonable and necessary living expense. Nonessential expenses like cable and fitness memberships will not be warmly received.
The judge then has to decide if this financial predicament is expected to be permanent, or at least outlast the loan life. Debtor’s education or health are factors in peering into that crystal ball.
The third test, having made a good-faith effort to repay, is a final nail in the non-dischargability coffin.
Factors there are have you applied for income-based loan-repayment plans; have you made payments at some point toward the overall balance; and is the loan a significant portion of your overall debt.
If you never made any payment attempt, you can still meet that third test. However, you will need to show the existence of a super-duper hardship.
Some bankruptcy courts give a partial discharge of student loans if the debtor didn’t prove entitlement to the whole thing. The debtor’s income and expense information is used to determine how much the debtor can afford to pay. In some cases, a court may adjust the interest rate or other loan terms to ease the repayment.
By the way, some bankruptcy courts have also ruled that student loans from private lenders are automatically discharged just like most other debts are.
Movement is afoot by some in Congress to amend the Bankruptcy Code to eliminate the “undue hardship” requirement. Student-loan debts are the only debts under the Bankruptcy Code requiring debtors to show “undue hardship” to get discharged.
Perhaps with a new legal claw hammer, the nails in the caskets of student-loan debtors can finally be pried out.
Brett Kepley is a lawyer with Land of Lincoln Legal Aid Inc. Send questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.
Brett Kepley is a lawyer with Land of Lincoln Legal Aid Inc. Send questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.

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