Discharging Student Loans in Maryland Bankruptcy : Overcoming a Difficult Proposition

Due to their increasing prevalence and the reduced certainty that a college education will result in a better paying job, student loans are more and more among the debts that bankruptcy filers hope to discharge in a Chapter 7 bankruptcy. Unfortunately, for most of these debtors, student loans are not among the debts they will be able to unload.

Student loans are notoriously difficult to discharge in bankruptcy. And no longer is this just true of federally funded student loans. Recent changes to U.S. bankruptcy law have made private loans for education just as difficult to discharge as federal loans. An individual’s situation must be very dire to convince a bankruptcy judge to discharge a student loan.

But that doesn’t mean it’s impossible.

In fact, a recent article from the Huffington Post highlighted a research paper by Harvard Law School graduate Jason Iuliano that suggests getting student loans discharged is easier than many people believe and that more debtors should attempt to discharge student loans in bankruptcy. Iuliano found that about 40% of debtors who seek discharge of student loans in bankruptcy are successful. While that’s certainly not a majority, it is a much higher success rate than the general public has been led to believe is possible. Iuliano also found that only 0.1 percent of bankruptcy debtors with student loans ever attempt to get their loans discharged and that approximately 69,000 debtors during the year of the study, who did not attempt to get their student loans discharged, would have been likely candidates for getting those loans discharged had they made the attempt.

Fortunately, Iuliano also revealed the common factors among those debtors who were successful in discharging their student loans. According to the research paper, debtors are more likely to get their student loans discharged if the following three situations apply:

1. The debtor is unemployed
2. The debtor has a medical hardship
3. The debtor had a lower annual income the year prior to filing for bankruptcy

How to Get Student Loans Discharged in Chapter 7 Bankruptcy

In order for a bankruptcy judge to consider discharging a debtor’s student loans, the debtor must bring an adversary proceeding lawsuit, often known as a Complaint to Determine Dischargeability, in his or her bankruptcy case. Failure to bring this proceeding results in the judge presuming a lack of undue hardship and the student loan won’t be discharged.

During the adversary proceeding, the debtor must prove that paying on the student loan or loans creates an undue hardship for the debtor. Most courts use a three-part test to determine whether an undue hardship exists. To qualify for discharge of student loans, a debtor must show to the court that:

1. The debtor can’t maintain a minimum standard of living for him/herself and his/her dependents, based on current income and expenses, if they must continue paying on the loan
2. Current financial circumstances will continue for most of the loan term
3. The debtor made a good faith effort to repay the loan

In most cases the court will presume a lack of undue hardship, so the debtor must be very convincing in proving his or her case to the court. One of the things a bankruptcy judge is likely to scrutinize closely during this proceeding is the reason the debtor is unemployed or underemployed. If the debtor could be earning more income but has chosen a lower paying job or allowed unemployment to persist for personal reasons, the judge is less likely to grant the student loan discharge. For example, refusing to work “menial” jobs or insisting on working an aesthetically pleasing job despite being qualified for much higher-paying jobs is not likely to sit well with the bankruptcy court.

However, there have been cases in which debtors choosing a low-paying job with a public benefit, such as working in a healthcare clinic for low-income families, has been allowed by a bankruptcy judge. In recent years bankruptcy courts have also been more lenient on employment considerations because of the economy. Success in meeting the three-part test depends largely on the debtor’s individual circumstances and the case they present.

Interestingly, a diagnosis of Asperger syndrome, which is a disorder related to autism, has very recently been found to qualify a debtor for a discharge of a student loan. Theoretically, other disorders that interfere with an individual's ability to relate to other people or their ability to hold a job could also qualify a debtor for discharge of student loans if the case is properly made to the bankruptcy court.

For some debtors, other parts of federal law may conflict with standard rules for the discharge of student loans. For example, federal statutes of the Defense Department include language that is inconsistent with U.S. bankruptcy laws and does not permit discharge of student loans under any circumstances. How a bankruptcy court rules in such a manner will depend on how the judge views the conflicting rules in light of the debtor’s circumstances. In cases like this, being represented by an experienced bankruptcy attorney, who understands the arguments involved, can be very beneficial.

Student Loans in a Chapter 13 Bankruptcy

Although student loans also face non-dischargeability in a Chapter 13 bankruptcy, there are advantages to filing for Chapter 13 bankruptcy if you are unable to get the student loans discharged in Chapter 7 bankruptcy. These include:

• Automatic stay on collection of student loans during bankruptcy proceedings — this applies to all other debts as well
• An automatic stay also applies on any co-debtor or guarantor of a debt during the case
• Delay or reduction of payments to student loans during the Chapter 13 repayment period
• No requirement to pay off the loan completely during the repayment period (though regular payments will resume after the repayment period)

In Chapter 13 bankruptcy, student loans are treated as a low-priority debt just like credit cards and other unsecured debts. The only difference is that while credit card debts and other unsecured loans can be discharged at the end of the repayment period, student loans are not discharged. You’ll be responsible for resuming payments on student loans at the end of the bankruptcy repayment period. However, Chapter 13 bankruptcy can give you the breathing room you need to fix your financial situation so you’re in a better position to make the payments once the repayment period is over.

Ensure the Success of Your Student Loan Discharge

If student loans are among the debts you hope to discharge in in your bankruptcy case, an experienced bankruptcy attorney can help you build a case with the best possible chance of succeeding. Your Maryland bankruptcy attorney knows what bankruptcy judges look for to determine undue hardship and can help you assemble evidence to prove your case.

In Maryland bankruptcy attorney John Burns and his firm are available to ensure the best possible chance of success in getting your student loans and other debts discharged. Call our office at 301-441-8780 to schedule an appointment.