Thinking of erasing student loans by claiming hardship?

Recent changes to the bankruptcy laws make the elimination of student loans through filing bankruptcy very difficult. In particular, once the debtor has filed her case, she must then file a separate lawsuit in the bankruptcy court against the lender, and then prove to the court that the student loans are causing an “undue hardship,” preventing financial rehabilitation. If the case cannot be settled by agreement with the lender, the debtor may have to conduct a full trial before a bankruptcy judge.

Some of the daunting challenges presented by this rather unusual procedure  were demonstrated by one of the last cases decided by the United States Bankruptcy Court in Massachusetts in 2009. The debtor had graduated from Stonehill College with her bachelor’s degree several years ago.  She worked a variety of jobs and paid down her student debt while working.

Then the problems came. The debtor married and with her husband had two small children. Her husband was eventully diagnosed with a “violent” seizure disorder, which put him on disability and put her in the position of being  unemployed and a full time care taker. By the time she filed for bankruptcy, she had $100 in the bank, about $25 left over in discretionary money left at the end of each month, and sometimes not even that, as she often had to visit pawn shops to make it until her husband’s check arrived.

One of the defenses raised by the lender at the trial was the availability of deferrment or forebearance options in lieu of a bankruptcy discharge. This is a common tactic. The law, however, does not prevent you from seeking a hardship discharge just because deferrment may be an option, and this was emphasized in the Massachusetts decision.

The bankruptcy judge in this case reiterated the strict standard that debtors will be held to before student loan debt will be discharged: they need to see “truly exceptional circumstances, such as illness or the existence of an unusually large number of dependents.”

Fortunately for this debtor, the court agreed that her woes were extraordinary, and she won her trial. The case is Torres v. Department of Education and you may want to read it if you think you are in a similar situation.

Consumers in the Merrimack Valley who find themselves burdened with student loans they can’t pay should seek the advice of a good bankruptcy attorney. Even then they may face a daunting challenge, but preferably they don’t go it alone.

 

By Doug Beaton

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