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Is student-loan debt dischargeable in bankruptcy?

The short answer is yes, but it is very difficult for borrowers to meet the high standard in federal law required to discharge them. At Gerner & Kearns Co., L.P.A., our highly experienced bankruptcy attorneys advise and represent lenders and other companies holding student-loan debt. Our knowledge of the intricacies of creditors' rights in bankruptcy allows us to provide informed, nimble guidance about the collectability of student loans and the likelihood of a court allowing discharge in any given borrower bankruptcy. 

We partner with our student-loan lender clients to create strategies for dealing with student-loan defaults, understanding that in some cases, out of compassion or for smart business reasons, it may be preferable to try to work out a resolution involving forbearance, restructuring or some other compromise. In other situations, we may decide together to challenge a borrower's attempt to discharge a student loan in an adversarial proceeding in bankruptcy court in Ohio, Kentucky, Indiana or Michigan. 

Undue hardship 

A debtor in bankruptcy cannot discharge a student loan unless he or she can show the bankruptcy court in an adversarial proceeding that the loan is an "undue hardship" on the debtor and his or her dependents. Whether an undue hardship exists is controlled in the Sixth and Seventh Circuits by the Brunner test, which requires that three things be true: 

  • The borrower cannot provide a minimal, basic living standard if he or she pays the student loan, considering his or her earning and expenses.
  • This situation is likely to continue throughout the repayment period.
  • The borrower has tried in good faith to pay the student loan. 

Factors that may be relevant to the court in analyzing whether an undue hardship exists may include: 

  • Debtor (or debtor's family member's) disability or illness
  • Learning disability or mental impairment
  • Nature of debtor's claimed living expenses
  • Total size of student-loan debt load
  • Personal circumstances like unplanned divorce or job loss
  • Income level compared with federal poverty guidelines
  • Earning potential, including age, educational level and skills
  • Whether the debtor's circumstances are within his or her control
  • And others 

A recent example 

A federal bankruptcy court in Ohio in October 2018 found in In re: Pierson that the debtor had successfully shown undue hardship for the purpose of having his student loans discharged. Factors that influenced the court included income below the poverty line, living standards indicative of poverty, limited earning capacity, learning disability and mental illness, age, limited skills and education, and a history of consistently trying to work. The case is an example of how dire a debtor's circumstances must be for an undue-hardship discharge. The opinion is available on Westlaw at 2018 WL 4849658.

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