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Bankruptcy may soon provide relief for more student loan debtors

In Arkansas and all other states, it is not quite true that student loans cannot be discharged. One expert who did a statistical study reported that 40 percent of requests to discharge student loans in bankruptcies were successful. The key is that the debtor must prove to the bankruptcy judge that retention of the loan will create an undue hardship.

It is true that the courts have generally adopted a very strict interpretation of undue hardship, but it is not an impossible standard to meet. It is also true that in the past decade the pendulum swung from the general dischargeability of student loans to the premise that they are generally not dischargeable. However, skilled bankruptcy attorneys have had some success in obtaining student loan discharges despite the changes.

Additionally, there have been extensive reports regarding the high numbers of student loan defaults in the past few years. The pressures on tens of thousands of student loan debtors, and the obstacles they face when trying to survive economically, have been cited widely in the media nationwide. This has had an effect on federal legislators who are working on passing new legislation in the U.S. Congress that will modify the harsh rules on bankruptcy discharges.

Despite the partial success rate in the granting of some student loan discharges in bankruptcies, the vast majority of student loan debtors who file for bankruptcy do not even ask for a student loan discharge. That is likely due to the additional expense associated with fighting such a claim, particularly when there can be no guarantee regarding the judge's decision. However, the push toward corrective legislation and the massive coverage the press is giving the negative economic impact of the crisis have created an environment where bankruptcy judges in Arkansas and other jurisdictions may find it appropriate to interpret the term "undue hardship" in a more expansive way.  

Source: Fox Business, "Will You Finally Be Able to Get Rid of Your Student Loans in Bankruptcy?", Steve Rhode, March 12, 2015

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