loans, generally, are not dischargeable under any chapter of the Bankruptcy Code
unless the borrower can show "substantial hardship."
A Bankruptcy can, however, eliminate other
debts that are competing for your dollars and provide a measure of peace during
a Chapter 13 plan. Further, in a Chapter 13, some courts permit the debtor
to separately classify a student loan so that a greater percentage of disposable
income goes to the student loan than non-secured debt.
A student loan can be discharged or
modified in a hardship proceeding. This is an adversary proceeding and requires
the filing of a Complaint to Determine Dischargeability. A discharge will be
granted if proved that repayment of the loan will create a substantial hardship
on the debtor/borrower and his or her family.
The hardship standard is generally interpreted to mean that the debtor cannot
maintain a minimally adequate standard of living and repay the loan at the same
time. Further, it also requires a showing that the conditions that make repayment a hardship
are unlikely to improve substantially.
Courts in some circuits will permit the judge to find that the debtor can
repay a portion of the loan without hardship, and to discharge the balance of
Contesting the Enforceability of the Loan:
Student loans are contracts like any other loan and are subject to challenge
for fraud, etc. Also, students loans are not enforceable when the school
has closed prior to the student completing his education. These challenges
could be raised in a Chapter 13 proceeding and decided by a bankruptcy judge.
In the usual Chapter 7, there is no dividend to creditors and thus no reason for
the bankruptcy court to rule on the enforceability of a claim, outside of an
adversary proceeding to obtain a hardship discharge.
Challenging the Loan Balance:
A pervasive problem in student loans is the state of the lender's records:
the loan has been transferred several times and it is not clear just what is
owed and whether all the additional charges are in accordance with law.
Consider using an objection to the claim of the holder of a student loan
in a Chapter 13 to get a judicial determination of the rights of the borrower.
In bankruptcy, the burden of proof is on the creditor. Once a judge
decides what is properly owed, principles of collateral estoppel
should make the decision of the bankruptcy court binding on the lender even if
the repayment period on the loan stretches beyond the end of the plan.
Living with Student Loans:
There is some small comfort in the federal regulations which restrict the
amount of a student/borrower's wages that can be garnished to repay a student
loan to 10% of the borrower's take home pay. Of course, the lender has the
right to intercept tax refunds and apply them to the loan in addition.
Student Loan Debt Links, Sources and Payment Alternatives