By Heather Faucher | Posted on August 20, 2009 | Filed Under Bankruptcy
Ahhh, fall is in the air. Back to school time for many across the land–including college students and recent college grads now swimming in student loan debt and struggling to make ends meet in the current economy. For those whose finances are dire enough, it may be time to consider bankruptcy. One often-asked question from people considering filing for bankruptcy is, “Can I get my student loans like the Federal Stafford, Federal PLUS and private loans forgiven through bankruptcy?”
Unfortunately, the answer to that question is probably not. Section 523(a)(8) of the US Bankruptcy Code, at 11 U.S.C. states that “an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual” are not dischargeable through bankruptcy unless “excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents”.
This means that all qualifying educational loans made solely to pay the higher education expenses of an eligible in situations where the student is the debtor, the debtor’s spouse, or the debtor’s dependent will not be forgiven during the bankruptcy process. The loans must apply to schools that are Title IV eligible and the student must be enrolled on at least a half-time basis. Of course, if the student used credit cards to finance tuition, that type of debt still will be dischargeable even if it was used to finance higher education expenses.
The only exception allowing federally-funded student loans and education loans funded or guaranteed by private nonprofit organizations to become dischargeable through bankruptcy is when the borrower files an undue hardship petition and the bankruptcy judge rules that the loan can be discharged. Of course, that brings about a new question. What’s going to make a judge find that a student meets the standard for “undue hardship?”
Most court cases cite Brunner v. New York State Higher Education Services Corp. for a definition of “undue hardship”. (See Brunner v. NY HESC (In re Brunner), 831 F.2d 395 (2d Cir. 1987), aff’g 46 B.R. 752 (Bankr. S.D.N.Y. 1985) ). In order to qualify for this exception, the student loan borrower must show:
1. That the debtor cannot both repay the student loan and maintain a minimal standard of living based on current income and expenses;
2. That this situation is likely to persist for a significant portion of the repayment period of the student loans; and
3. That the debtor has made good faith efforts to repay the loans.
If the borrower demonstrates these three elements to the court, then chances are their student loan debt will be ruled dischargeable through bankruptcy.
Thinking about filing bankruptcy? Find more information here.
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