Chapter 7 student loan bankruptcy hardship discharges are hard but not impossible to get. A Chapter 7 debtor must prove the following:
- Every option has been taken to attempt to repay the student loan.
- No disposable income exists to repay the student loan.
- There will never be a disposable income to repay the student loan.
- Not granting a hardship discharge creates an “undue hardship” on the debtor and the debtor’s dependents.
Chapter 7 Student Loan Hardship Discharge
In essence, you state that the student loan will never be collectible and that collections are abusive to 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 Chapter 7. Often the best strategy is to attempt to partially discharge the student loan instead of attempting to hardship discharge the entire loan.
Student Loans in Default
Оn an average, student loans in default make private lenders 25 times the profit as when you pay the loan on time. Before 2010 only 25% 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. Additionally, 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.
For the loans that might never be repaid, Sallie Mae transfers the loans in serious default to the US Dept of Education. Even then the US Department of Education makes a 20% profit from those loans. Therefore, there is no profit motive to help loans become timely. Instead, lenders have incentives to insure student loans stay in default. Without going to court, Federal student loans allow the garnishment of Social Security, disability, tax refunds, wages, homes, and bank accounts. Student loans are easier to collect than child support or tax debts.
The Rules for Student Loan Discharges
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 imposes an undue hardship on the debtor and the debtor’s dependents.
Student loan hardship discharges are sometimes granted for medical reasons that preclude working. Other hardship discharges exist, as well. In addition, many cases show partially discharged student loan debt even when it is very unlikely the debtor will ever have the capacity to pay back 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. They often take the position that at some point the debtor might 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. That’s because they have little incentive to strike a deal.
Resources for Student Loans
Do you need help managing your student loan? Contact my office right away to start the conversation. Nick C. Thompson, Attorney: 502-625-0905