The $1.2 trillion that is owed in the country for student loan debt constitutes the highest amount of consumer debt except for mortgage debt. In prior days, a student loan could be discharged in a bankruptcy as an unsecured debt. However, Congress has passed several laws making it tougher and tougher to do so. The problem is now critical for the economy and in the lives of many persons in their fifties and sixties, including here in Arkansas.
The fact is that discharge of a student loan is not impossible in a bankruptcy under current laws. It’s just very difficult under the standard developed by federal courts. The main requirement is that the debtor must show that there would be an “undue hardship” should the discharge be denied. It is the court decisions that have interpreted undue hardship in a way that makes it very difficult to prove.
The standards for proving undue hardship are generally as follows:
- The debtor cannot maintain a minimum standard of living if forced to repay the loans;
- This inability to maintain a minimum standard is likely to continue for a significant portion of the loan repayment period; and
- The debtor has tried in good faith to make repayment.
It may be beneficial for some debtors to try and get their student loans discharged. For example, a person who owes $30,000 on an original loan of $8,000, and who obtained a two-year associates degree, may be embroiled in a hopeless cycle of trying to make ends meet. Many routine jobs are in the semi-poverty range, and those persons barely survive economically. To suggest that their situation will change to accommodate an additional hefty monthly payment is to engage in fanciful thinking.
In Arkansas and elsewhere, it may prove beneficial to consult with a bankruptcy attorney to determine the prospects for trying to discharge student loans. In any event, someone with student loans, along with credit card debt and medical bills, can discharge the latter two categories and have an easier chance of then dealing with the student loans. Furthermore, creditors do not collect on student loans during the pendency of a bankruptcy.
Source: insurancenewsnet.com, “Erie-area woman takes rare route over student loans: bankruptcy”, Ed Palatella, Sept. 21, 2014