Until 2005, students could freely file bankruptcy and discharge private student loans. Prior to 1998 student loans could be bankrupted 7 years after they became due. However after 2005, the bankruptcy options on student loans have been cut down to discharging the debts only if they can show their qualify for a hardship discharge or one of the other very few categories of discharging the debt.

Hardship Discharge

Hardship means that the court must rule that repayment of the student loan will create an undue hardship on the debtor/borrower and his family. Undue hardship is defined as the debtor cannot maintain a minimally adequate standard of living and repay the loan. The Debtor has to prove that repayment and living at minimum standards are impossible and that this situation is unlikely to improve substantially over time.

Most judges use the undue hardship from the 1987 case argued before the U.S. Supreme Court in MARIE BRUNNER, v. the New York State Higher Education Services Corp. Most defaulted student loans can be rehabilitated, consolidated, stretched out or discharged if the default is because of disability. As long as a loan can be converted to an income based repayment loan then it is probably impossible to discharge. Income based repayment loans can have very low rates of repayment. However private loans cannot be converted to income contingent loans.

If the borrower does reach the “wage garnishment” stage, some comfort can be taken in the fact that federal regulations limit the amount of the student/borrowers garnishment to 10% of the total amount borrowed. Before reaching that stage, other options are available including contacting various agencies who can offer workouts and student loan consolidation programs for loans in trouble, including programs based on income. Nolo Press and EdFund have information on student loans. Carreon & Associates provides information on defaulted loans and the Department of Education and Consumer reports provides facts on graduated payments.

To hardship discharge a student loan the debtor has to show that he has exhausted all of the other options and bankruptcy is his last resort. One of the better arguments is to show that a partial discharge will allow the debtor to discharge the part of the debt that will make it an undue hardship and that the debtor will remain responsible for the remainder. If the Debtor makes an all or nothing argument to the court he should have a very strong case to support undue hardship.

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