Even in a declining job market and weak economy young people are still being encouraged to invest in a four year college education and if possible, take up a career specialty by enrolling in a graduate school for advanced training. All of these options may sound good, but today’s students are reluctant and with good reason to accumulate large sums of debt without some assurance of finding work when the education ends and student loan repayment begins.
The issue no one likes to consider is what happens if after running-up large sums of student debt, the graduate is later unable to repay the debt? Under these circumstances, will the student borrower be able to discharge the debt should economic conditions force the debtor into filing for bankruptcy?
Recent laws have all but eliminated the consumer protections afforded by bankruptcy as it relates to the repayment of student loans, and if the government is the lender or guarantor of such loans, the student borrower should know that the government has the power and authority to garnish wages, tax returns and even social security disability income without having to first obtain a court order.
The courts determination to discharge student debt is not an automatic process when filing for bankruptcy. It is up to the debtor’s attorney to plead sufficient facts establishing the actual hardship of the debtor. Since 1998, federally guaranteed student loans have been non-dischargeable except in cases involving permanent disability or death. Under current bankruptcy law, debtors may discharge their debt under either Chapter 7 or Chapter 13 plan, but only if the debtor can prove that repayment of the debt would cause an undue hardship.
Qualifying For Discharge of Student Loan Debts
Bankruptcy judges apply a test for what constitutes undue hardship under a student loan discharge case. While courts vary depending on jurisdiction and judicial disposition, they generally disfavor discharging student loans. In another words, the cards are usually stacked against the student borrower and in favor of the commercial lender.
The following are descriptions of the two judicial standards used in determining a finding of undue hardship and therefore the eligibility for discharge in cases involving student loan debts.
Three Qualifications For Discharge – Totality of Circumstances
The first test, known as the Brunner test, allows for the discharge of student loans if the debtor can meet each and every one of the following three qualifications: First, the debtor must technically be in poverty and unable to maintain a minimal standard of living if forced to repay the student loans. Two, the debtor must prove that their poverty will likely continue through the entire repayment period. Three, the debtor has made a good faith effort to repay the student loan but has been unable to repay the debt under the totality of the debtors circumstances.
Undue Hardship of Student Debtor
The second test focuses on the totality of the debtors circumstances in determining whether repayment will constitute an undue hardship on the debtor. Under this standard the bankruptcy court will consider all of the debtors relevant fact and circumstances to determine whether denying the discharge would cause an actual undue hardship.
When using the undue hardship test, judges seem to be inclined to grant a complete discharge of the debtors student loans rather then just a partial discharge, though the court has the authority to choose either option.
The public policy goal behind bankruptcy has always been to provide the debtor with a fresh start. Hampering the debtor with having to make partial student loan payments is often seen as being counterproductive to this overriding public policy goal.
Student Loan Debt From Online Trade and Vocational School Tuition
With the commercialization of online education, courts have been very skeptical when the student loan arise out of tuition from questionable online vocational and trade school programs.
If you can prove that the trade or vocational school engaged in fraud or other forms of sharp business practices in the enrollment and registration process, you can request the court to invalidate the tuition debt entirely.
Non-Discharge of Student Loan Debt – Options
In the event you have not been successful in getting your student loans discharged in bankruptcy, you will be obligated to make repayment depending on the type of bankruptcy proceedings you filed.
In Chapter 7 bankruptcy you will likely be obligated to repay the full amount of your student loans. If you filed under Chapter 13 bankruptcy, you will still be obligated to repay but may be able to proceed with a flexible work-out of the debt over an extended period of time which gets approved by the court as part of your overall plan. In this regard, it is strongly recommended that you consult with a bankruptcy lawyer to fully understand your options.
Finally, be advised that not everyone chooses bankruptcy. Remember, bankruptcy will remain on your official credit history for a period of ten years. In this time, obtaining credit will be extremely problematic and rehabilitating your credit history will take a great deal of your time and effort. Filing for bankruptcy is usually considered as a last resort – but one that is extremely valuable to consumers in troubled times.