Student Loan Discharge: Bankruptcy Court Explains Undue Hardship

Bankruptcy clients usually accept the fact that student loans are not dischargeable. Some clients are aware of the "undue hardship" exception where these loans can be discharged. It is very difficult to wipe out student loans as an undue hardship. A recent bankruptcy court decision, issued in November, 2007, explained the undue hardship standard in detail and why it applies to so few debtors. The case is In Re Cynthia Matthews-Hamad, Case No. 02-15746-8W7 and Adv. Pro. No. 05-81.

The bankruptcy judge explained that there are three parts of the undue hardship test each of which the debtor must establish by a preponderance of evidence. First, the debtor must show that based on his current income and expenses he cannot maintain a "minimal" standard of living for himself and his dependents if forced to repay student loans. Minimal standard of living does not mean the debtor must live in poverty but it also does not mean the debtor is entitled to his existing comforts. Second, the debtor must establish circumstances indicating that his financial state of affairs is likely to persist for a significant portion of the loan repayment period. The debtor must show his will be unable to pay student loan debt in the future for reasons outside his control. The debtor must demonstrate circumstances that stongly suggest an inability to pay the loan over an extended period of time. The bankruptcy court stated that only a debtor with rare circumstances will satisfy this second part of the undue hardship test. Such circumstances include, for example, illness disability, or lack of suitable job skills. Finally, the debtor must show he has made a good faith effort to repay the student loan. Efforts to seek out option to make the student loan debt less burdensome is an important part of good faith.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida