Student Loans in Chapter 13 Bankruptcy
Student loans are generally not dischargeable unless the court finds that a hardship discharge should be granted. In a Chapter 13 the debt may be challenged as fraudulent or otherwise being unenforceable. Students loans are not enforceable when the school has closed prior to the student completing his education or if the debtor didn’t qualify for the loan or school. A Chapter 13 Debtor can allow the debtor to repay the student loan a higher amount than his other unsecured debts or file an adversary proceeding proving that the Debtor has:
- taken every option to attempt to repay the student loan (including Income contingent loans)
- no disposable income exists to repay the student loan
- never will and
- not granting a hardship discharge would create an “undue hardship” on the debtor and the debtor’s dependents.
The Loan Will Never Be Collected
In hardship adversary proceeding you are essentially saying the student loan will never be collected, and all that collections will do in the future is to abuse the debtor and worsen the plight of the debtor needlessly. If you can’t prove that statement then you probably can’t hardship discharge the student loan in a Chapter 13. Often the best strategy may be in a Chapter 13 to attempt to hardship discharge part of the student loan instead of attempting to discharge all of the loan.
Lenders will normally respond to your adversary proceeding. You will have to answer questions in discovery to educate and prove to the judge that you can’t reasonably repay the debt. But this is your opportunity to explain to the judge that your loan should be hardship discharged in bankruptcy.
Remember your loan makes the lender a profit. He won’t want you to be able to destroy his very profitable income. Any money he spends defending the case is reimbursed in full so he has no loss if he viciously defends the case. Remember guaranteed private student loans in default on an average make private lenders 25 times the profit as loans that are paid on time.
Student loan hardship discharges exist under programs other than bankruptcy if your school closed, you are now disabled or if fraud existed in your loan.