December 9, 2019

How Chapter 7 Can Help You Pay Your Non-dischargeable Student Loans

Bankruptcy Code 523(a)(8)In my last post, I argued that the current Bankruptcy Code standard for discharging student loans is unduly harsh and burdensome.   Currently student loan debt – and this includes private student loans, government backed student loans, parent incurred loans, and loans paid to schools that have closed down before the student received training or a degree – may not be discharged in bankruptcy unless the debtor can show “undue hardship.”

The courts have read undue hardship to mean some reason beyond the debtor’s control that would preclude repayment.   This usually means that there must be some medical reason that the debtor will not ever be able to return to work.  Underemployment is specifically not a reason to allow undue hardship.  As far as the courts are concerned, debtors who are healthy always have opportunities to increase their income so that they can pay their student loan debt, whether payment comes next year or in 20 years.

It seems oddly inconsistent for the Bankruptcy Code to allow debtors to discharge income tax debt solely based on its age ( income tax debt that is 3 or more years old may be discharged) but for all intents and purposes will not allow for the discharge of student loans despite the fact that:

  • student loans are typically incurred by 17 year olds with little understanding of what real world debt means
  • colleges and student loan lenders have less disclosure requirements than credit card lenders
  • loans remain non-dischargeable even if the school goes out of business and does not provide the education
  • parents who sign for loans have no recourse even though they did not get the benefit of the education
  • colleges have used the wide availability of government guaranteed loans to boost tuition costs at many times the rate of inflation
  • colleges bear no responsibility for offering courses of education that are unlikely to result in salaries sufficient to pay the loans

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