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Student Loan Bankruptcy Qualifications

Yes it is hard to bankrupt student loans. How hard is it? We think that some judges go beyond the standard. Federal bankruptcy courts grant bankruptcy student loan discharges based on section 523(a)(8)’s “undue hardship” standard. Some courts will allow attorneys and doctors to discharge a student loan while others will be harsh. In an Ohio case, the court found that a disabled blind person did not have an undue hardship.

What Is Needed To File Bankruptcy on Student Debt?

The Debtor in Wallace v. Educational Credit Management Corp., 2010 WL 5764771 (Bky.S.D. Ohio Dec. 1, 2010), was diagnosed with diabetes with $32,500 in student loan debt. He only worked for one year after graduation and never earned over $12,000. He became blind and was forced to leave the workforce due to his diabetes.

The debtor was forced to undergo dialysis, kidney and pancreas transplants. By he had lost his right right eye, was legally blind, and living on 811 per month in social security disability. He lived with his father with $790 per month in expenses. He had no job after the first year of employment and the student loan balance increased to $38,000.

The bankruptcy judge stated that the “Brunner” test could be met only if the debtor could show:

(1) That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a signicant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the student loans.

The court held that the first prong of the Brunner test had been met, the debtor could not prove the second. Because it was possible that the debtor might someday be able to make payments, the second prong of the Brunner test had not been satisfied.

The court did not issue an order of nondischargeability. Instead, it scheduled a status conference for two years later, when it would determine whether the debtor’s ability to repay had changed. In the meantime, the court ordered the debtor to pay $20 per month toward his student loan leaving him 1 dollar in disposable income.