Bankruptcy And Student Loan Debt

Until recently, it has been widely accepted that student loan-related debt can only be cancelled in a bankruptcy proceeding if the borrower is able to show that paying the debt would impose an ‘undue hardship’. Successfully showing an undue hardship in a bankruptcy case is hard to do and rarely happens. However, this may be changing as several consumer advocacy groups and some lawmakers are lobbying for changes in the Bankruptcy Code that would allow bankruptcy to wipe out at least part of the filer’s student debt. Additionally, a recent decision from the U.S. Bankruptcy Court in Brooklyn, N.Y. has helped chip away at the near immunity that student loans have enjoyed from bankruptcy proceedings.

The Bankruptcy Court’s Recent Ruling

According to the Wall Street Journal, a federal bankruptcy judge has ruled that law school graduates who incur debt while studying for the bar exam can in fact have that debt cancelled if the student files for bankruptcy protection. The court reasoned that a bar exam loan is the result of an arm’s length agreement based on commercial terms, and therefore is distinct from a traditional student loan. This is in part due to the fact that bar exam loans involve low risk for lenders because the borrower has already received their degree and only has to pass the bar before they theoretically will be able to start working and repay the loan.

This ruling is particularly important because it contradicts the court’s prior approach to bar-study loans which has historically been to treat them as a student loan. The Wall Street Journal’s article notes that bankruptcy judges have traditionally had a knee-jerk reaction that if a debt is anything like a student loan then it is classified as nondischargeable. This recent ruling greatly departs from the traditional mindset and may indicate that there is a movement towards allowing some types of student-related debt to be cancelled via bankruptcy.

The Push For Bankruptcy To Cover Student Loans

The Student Loan Hero reports that in 2016 Americans have more student loan debt than ever before. This claim is backed up by some staggering figures including the fact that Americans owe almost $1.3 trillion in student loan debt and that this debt is spread out among 43 million borrowers. Because so many Americans are swimming in education-related debt, consumer advocacy groups and others are calling for reforms to our bankruptcy laws that would provide legal relief for student borrower who are bankrupt.

For example, the SCTimes recently reported that a lawyer out of St. Cloud is lobbying his state senators to change the rules surrounding Chapter 13 bankruptcy. The lawyer is arguing that debtors who file for Chapter 13 bankruptcy should be able to discharge their student loan debts in the same way that some other types of debt are currently allowed to be wiped out. He insists that debtors are rarely able to show undue hardship in court because debtors have the deck stacked against them as it can be very expensive to attempt to prove undue hardship.

How Can We Help?

If you live in Chicago and feel that you are unable to dig out from under your student loans or other debt, contact a local bankruptcy lawyer today. The experienced lawyers at the Bentz Holguin Law Firm, LLC are happy to speak with you about your bankruptcy options and can be reached today at 312-647-2116.