Student Loans

Congress has now made almost every student loan a non-dischargeable debt.

Chapter 7 Hardship Discharge.

In a Chapter 7 case there is only one way a student loan can be eliminated.     The Debtor must file an adversary proceeding and prove that repayment of the student loan will create an undue hardship on the debtor/borrower and his family. Courts usually interpret this to mean that the debtor cannot maintain a minimally adequate standard of living and repay the loan.   It usually requires a showing that the conditions that make repayment a hardship are unlikely to improve substantially over time, such as a major disability.

Chapter 13 Treatment.

Student loans create a major problem in Chapter 13 cases since the loans are not discharged, and do not have any greater priority than other unsecured debts.   Some bankruptcy courts will permit debtors to separately classify student loans in Chapter 13 and pay them a greater percentage than other unsecured debt, but most courts do not allow this different classification.  Thus while in the Chapter 13, the student loan creditor must accept the payments that are being made though the Chapter 13 plan, but after the completion of the Chapter 13 plan these loans must be re-paid.  If the debtor can qualify for a hardship discharge of the loan in a Chapter 7, then they might be able to obtain a hardship discharge in a Chapter 13.  This usually will only happen if the debtor became disabled during the Chapter 13.  Sometimes a student loan may not be enforceable under non-bankruptcy law. See non-bankruptcy options.  In these cases the debtor may want to raise that issue in an objection to claim.

Non-bankruptcy Defenses.

Student loans may not be enforceable if the school has closed prior to the student completing his education.    One may also want to challenge the amount that is owed on the student loan, since multiple transfers of these loans can result in excessive or illegal charges.    Finally federal regulations do limit garnishments by student loan creditors to 10% of take home pay.

This page was last updated: March 24, 2011