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Chapter 7 Student Loan Hardship Discharge

chapter 7 hearingChapter 7 student loan bankruptcy hardship discharges are hard but not impossible to get. A Chapter 7 debtor has to prove that:

  1. he has taken every option to attempt to repay the student loan
  2. no disposable income exists to repay the student loan
  3. never will and
  4. not granting a hardship discharge would create an “undue hardship” on the debtor and the debtor’s dependents.

In essence you are saying the student loan will never be collected, and all that collections will do is abuse the debtor and worsen the plight of the debtor needlessly. If you can’t prove that statement then you can’t hardship discharge the student loan in a Chapter 7. Often the strategy may be best to attempt to partially discharge the student loan instead of attempting to hardship discharge all of the loan.

Student Loans in Default

Оn an average they make private lenders 25 times the profit as loans that are paid on time. Before 2010 only 25 per cent of Sallie Mae loans were in default. Those loans averaged 5 times the profit (900 billion) as the other 75% of the loans that were paid on time (under 200 billion). Student loans are subject to a 25% penalty, other default and collection fees just like credit cards. Just as credit card fees make the majority of the profit for credit cards the student loans in default make the majority of the profit for Sallie Mae. Sallie Mae transfers the seriously defaulted loans which will probably never be repaid to the US Dept of Education. Even then the US Department of Education makes a 20% profit from those loans. There is no profit motive to help loans become timely. Instead lenders have incentives to insure student loans stay in default. Federal student loans allow garnishment of Social Security, disability, tax refunds, wages, homes and bank accounts without going to court. Student loans are easier to collect than child support or tax debts.

The rules for student loan discharges are found in Section 523(a)(8), which denies a bankruptcy discharge… unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents

Student loan hardship discharges have been granted for medical reasons that would preclude working. Other hardship discharges exist. Many cases have partially discharged student loan debt even when it is very unlikely the debtor will ever have the capacity to pay back a student loans.

It isn’t enough to say that a person has a temporary problem and expects to find a job soon. Judges look at education, health and potential earning potential and often take the position that at some point the debtor may be able to repay some part of the student loan and should be denied a hardship discharge. Student loan lenders believe bankrupting the debt is unlikely, so they rarely work out modifications or any repayment deal. They have little incentive to strike a deal.