Chapter 7 Bankruptcy Student Loan Hardship Discharges

Student Loan Bankruptcy Hardship Discharge

Chapter 7 Student loan Bankruptcy hardship discharges are hard but not impossible to get.  A Chapter 7 Debtor has to prove that the Debtor has:

1. the Debtor has taken every option to attempt to repay the student loan
2. no disposable income exists to repay the student loan 
3. never will and
4. not granting a hardship discharge would create an “undue hardship” on the debtor and the debtor’s dependents. 

In essence you are saying the student loan will never be collected, and all that collections will do is abuse the debtor and worsen the plight of the debtor needlessly.   If you can’t prove that statement then you can’t hardship discharge the student loan in a Chapter 7.   Often the strategy may be best to attempt to partially discharge the student loan instead of attempting to hardship discharge all of the loan. 

The idea is to remember that student loans in default on an average make private lenders 25 times the profit as loans that are paid on time.   While only about 25 per cent of the loans held by Sallie Mae were in default those loans averaged 5 times the profit (900 billion) as the other 75% of the loans that were paid on time (under 200 billion).   Student loans are subject to a 25% penalty, other default and collection fees just like credit cards.  Just as loans that are in default make the majority of the profit for credit cards the student loans in default make the majority of the profit for Sallie Mae.  Seriously defaulted loans are transferred to the US Dept of Education.  Even then the US Department of Education makes a 20% profit from those loans.  There is no motive to insure loans are timely repaid.  Instead lenders and the government have incentives to insure loans stay in default and stay there.  Student loans allow garnishment of Social Security, disability, tax refunds, wages, homes and bank accounts without going to court.  Student loans are easier to collect than child support or tax debt.

The rules for student loan discharges are found in Section 523(a)(8), which denies a bankruptcy discharge . . . unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents

Student loan hardship discharges have been granted for medical reasons that would preclude working.  Other hardship discharges exist.  Many cases have partially discharged student loan debt even when it is very much unlikely that the debtor will ever have the financial capacity to pay back his student loan debt.

It isnt enough to say that a person has a temporary problem and expect to find a job soon.   Judges look at a students education, health and potential earning potential and often take the position that at some point the debtor may be able to repay some part of the student loan and should be denied a hardship discharge.   Student loan lenders believe that bankrupting the debt is unlikely, so they rarely work out modifications or any repayment deal.  They have very little incentive to strike a deal.

Nick Thompson Louisville Kentucky Student Loan Hardship Discharge Bankruptcy Attorney