Student loans can account for a significant portion of a person’s debt load, and many have trouble repaying the debt. Fortunately, despite popular belief, it’s not quite true that a person in Arkansas or any other state cannot discharge a student loan obligation in bankruptcy. In fact, if one files for bankruptcy, it may be advisable to list the student loan as a dischargeable debt and try to get it wiped out. The rule that the court will use to decide the issue is called the undue hardship test.
It means that the court must allow the discharge of a student debt where there would be undue hardship to a debtor who still has the loan to pay after the bankruptcy. It therefore boils down to the definition of undue hardship. Generally, courts have been very restrictive in defining when undue hardship actually exists in a case.
The real reason for so few student loan discharges, however, is that the debtor does not try to get rid of them in the bankruptcy. One study indicates that at least 40 percent of those who try to discharge their student loans get part or all of that debt eliminated. Strangely enough, only about 0.1 percent of consumers filing bankruptcy have tried to include the loans in their bankruptcy proceedings.
The test that most bankruptcy courts use consists of three questions. Will the borrower be able to maintain a minimum standard of living if the loan is kept? Will the borrower’s financial status improve in the future? Has the borrower made a good faith effort to pay back the loan? One has to be able to answer no to these three questions and prove it in a special proceeding in the bankruptcy called an adversary proceeding.
There is a risk that a person may spend the extra funds to have the attorney try and get rid of the student loans in an adversary proceeding and then lose. In that event, the additional funds spent will be a lost cause and would not be refundable by an Arkansas law firm or one located elsewhere. Therefore, the decision whether to go forward with an adversary to eliminate a student loan is one that will be made after thorough consultation between the client and the bankruptcy attorney.
Source: finance.yahoo.com, “Yes, You Can Get Rid of Your Student Loans Through Bankruptcy. Here’s How“, Constance Brinkley-Badgett, July 6, 2016