Student Loans in Bankruptcy

Student loans are no longer dischargeable in bankruptcy just because they have been in pay status for a given period of time. The only way the loan can be discharged is by proving that repayment of the loan will create an undue hardship on the debtor/borrower and his family.

This standard is generally interpreted to mean that the debtor cannot maintain a minimally adequate standard of living and repay the loan. It usually requires a showing that the conditions that make repayment a hardship are unlikely to improve substantially over time. Many courts use the test for undue hardship found in the Brunner case.

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 the loan.

To discharge a student loan in bankruptcy, the debtor must bring an adversary proceeding in the bankruptcy case. The debtor must prove at trial that repayment constitutes undue hardship.

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. 59 Fed. Reg § 22473.

Of course, the lender also has the right to intercept tax refunds and apply them to the loan.

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