Ohio students know how expensive attending college is. Students are often left with crippling credit card, student loan and other debt with hefty minimum payments.
It is commonly thought that student loans cannot be discharged in bankruptcy. For the vast majority of people this is true. In fact, section 523(a)(8) of the Bankruptcy Code makes clear the presumption that student loans cannot be discharged.
Undue Hardship Exception
However, the Code contains a very limited exception. The presumption against discharging student loans can be overcome if the student shows undue hardship. The undue hardship must be shown through a preponderance of the evidence.
This is a difficult standard to meet because bankruptcy courts usually advise students to take advantage of available federal programs to defer payment, rather than allow discharge of the debt. Additionally, the student must show more than simply financial difficulty. The purpose of this high standard is to prevent students with no true economic hardship from discharging debt immediately upon graduation.
Even if a student meets the burden of proof and shows undue hardship, the debt is not necessarily immediately discharged. A bankruptcy court must agree with the finding before the student is officially relieved of the debt.
If the court agrees, the debt is immediately cancelled. Additionally, filing for bankruptcy prevents all creditors from attempting to collect debt.
Students seeking student loan discharge under the undue hardship exception must file a separate petition. It is not automatically determined as part of the normal bankruptcy process. If a bankruptcy is already in progress, for an additional filing fee the case can be reopened to file for student loan discharge.
Tests for Undue Hardship
There is no specific definition for undue hardship. Therefore, two tests are used to determine whether a student qualifies for the undue hardship exception.
- Based on current income and expenses, they cannot maintain a minimum standard of living for themselves and dependents if forced to pay the loans.
- Additional existing circumstances show this situation is likely to exist for a significant portion of the repayment period.
- A good faith effort was made to repay the loans.
Although a majority of courts use the Brunner test, a modified version is used by the Tenth Circuit. This test considers whether the student truly cannot afford to pay the loans. It also develops the good faith portion of the Brunner test by determining if the student is contributing to the hardship in some way.
Student Loan Discharge Is Not the Only Answer to Debt Problems
Although only a very small number of people will qualify for the undue hardship exception, a person experiencing difficulty paying student loan and other debt can still benefit from the assistance of an experienced bankruptcy attorney. A bankruptcy lawyer can explain options to wipe out other debt to free up cash to pay the student loans or how to defer the student loans for 3-5 years in a Chapter 13 bankruptcy.